Trading Stock-Market Indices
A stock market index is a statistical measure of the daily change in a broad portfolio of stocks. The first index was introduced by Mr. Charles Dow in 1896. In any stock index, each stock represents a percentage weight (%) of the overall weighting (100%). The weight of each index is usually based on the market capitalization of each company listed. Stock indices are used as a general measure of a stock-market trend but they can be traded also like any other financial asset. Trading stock indices instead of trading individual stocks have proved particularly profitable and that is why many mutual funds are imitating the composition of popular stock indices instead of making their picks.
These are the most important stock-market indices in the world:
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Hang Seng (Hong Kong)
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CAC 40 (France)
MAJOR US STOCK MARKET INDICES
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average or simply Dow Jones includes 30 companies based in the US, and it is considered the most important stock market index worldwide. A trading strategy that fails in DJIA will probably fail in any other stock-market index.
► Official Dow-Jones website | ► CME Group
» More about Dow Jones Industrial
Standard and Poor's Index (S&P 500)
The S&P 500 index covers a broad area of the US economy as it includes the daily price changes of 500 listed companies. These 500 companies represent about 70% of the total US stock market value. The S&P 500 is weighted solely based on market capitalization.
- Note that the top 45 companies listed on the S&P 500 today count more than 50% of the index’s total weight
- The S&P 500 includes stocks from many different industries such as financial, energy, the Internet, industrials, healthcare, and consumer goods
- Since its inception, the S&P500 compound annual growth rate has been approximately 9.8% (6.0% after inflation)
Nasdaq Composite Index
The Nasdaq Composite Index is an index specialized in technological stocks. The index was introduced in 1971 and today contains 4,000 stocks (technology, biotech, financial, consumer, and industrial). The weight of each company listed on the Nasdaq Composite is based on its market value. There is also the Nasdaq 100 index which includes 100 non-financial companies.
Russell 2000 Index
In contradiction with the other pre-mentioned stock indices, the Russell 2000 aims to measure the daily change of small-capitalization companies. It was introduced by Frank Russell Company in 1972 and today includes 2,000 stocks. Companies included in the Russell 2000 are weighted based on their market capitalization. Stocks priced under $1 are excluded while the average capitalization per listed company is about 0.5 billion USD.
OTHER MAJOR STOCK MARKET INDICES
The German DAX 30
Introduced in late 1987, DAX is the most important German stock market index. DAX includes the 40 largest companies listed on the Frankfurt Stock Exchange and it is a blue-chip stock market index. The DAX works as a performance index, meaning that the dividends of the listed companies are accounted as reinvested capital. The performance of the DAX can be seen as a key indicator for the development of the German and the European economy.
The British FTSE 100
Introduced in 1984, the FTSE 100, or informally the "Footsie" is an index of the 100 largest companies listed on the London Stock Exchange (LSE).
- FTSE 100 is Britain’s flagship stock market index
- The five-year average P/E of the FTSE 100 is x14.5
- The average dividend yield of FTSE for the past 25 years is 3.52% (the 25-year high is 7.01% in 2020 and the 25-year low i1.94% in 2000)
The Japanese NIKKEI 225
Introduced in July 1950, the Nikkei 225 is the leading Asian stock market index. The Japanese NIKKEI 225 (日経平均株価, Nikkei heikin kabuka) consists of 225 Japanese domestic stocks listed in the Prime Market of the Tokyo Stock Exchange.
- The Nikkei Stock Average (Nikkei 225) is used around the world as the premier index of the Japanese stock market
- Nikkei 225 is a price-weighted equity index with a calculation frequency of every 5 seconds
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» RUSSELL 2000 Small Cap
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» The British FTSE 100
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