All you need to know about stock market indices

Stock market indices

All you need to know about stock market indices

Ibex, NASDAQ, Dow Jones… may all ring a bell but most people still have trouble understanding these financial concepts. While these give name to some of the most important stock market indices, the truth is that there are hundreds of them. But, what do they really stand for and what is their function?

A stock market index is frequently defined as measurement or indicator which reflects the value of a specific section of the stock market at a specific point in time. More specifically, each of these is comprised of different companies or assets that gather common characteristics and their numerical value is calculated on the basis of their performance. Therefore, both traders and investors use these indicators as a tool to decide their trading strategies and forecast the return of their investments. Yet, not all stock indices are the same nor formed according to the same criteria.

Types of stock market indices

There are four major categories of stock market indices: national, regional, international and sector-related. Of these, the most quoted ones are the national indices, which are those comprised by assets from the same country. A well-known example is Dow Jones Industrial Average, which integrates 30 of the most powerful companies in the USA, along with S&P 500 from the same country.

Something similar occurs in Europe with the most powerful assets of each country featuring a common national stock market index. That is the case of, for example, the British FTSE 100, the Spanish IBEX 35, the German DAX 30 or the French DAC 40, among many others. Likewise, we find the Japanese Nikkei 225, the Hang Seng Index from Hong Kong and the SSE Composite from Shanghai as the most prominent indices in Asia whereas the Mexican IPC, the Argentinian Merval and the Chilean IPSA stand out in South America.

The third group corresponds to those indexes which extend beyond national boundaries or have a supranational origin. Notable among these are the MSCI World, comprised by more than 1,600 companies from 23 different countries; the Eurotoxx 50, which integrates the 50 most important companies in the eurozone; or, the S&P Asia 50 including companies from the stock exchanges in Hong Kong, South Korea, Singapore and Taiwan, to name some.

The fourth category of stock market indices refers to those consisting of companies belonging to a common sector. Wilshire US REIT, for instance, is made up by a total of 80 assets from the real estate sector, whereas Nasdaq 100 gathers 100 assets belonging to the technological sector.

Bitcoin: the new safe haven asset

A new group of assets that are gaining popularity in recent years are the cryptocurrencies, of which most popular representative is the Bitcoin. This digital asset works as any other currency with the exception that it is neither linked to any state nor operates within the framework of the stock market.

Although the value of this asset keeps fluctuating due to its recent creation, some experts expect that it will reach the price of 1.000.000 USD in the next years. Such optimistic forecast has inevitably attracted greedy traders as well as investors seeking to store their cash in times of crisis and geopolitical instability.

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