In finance, an index usually refers to a certain statistical measure of any change that occurs in the securities market.
As far as financial markets are concerned, various stock and bond market indices typically consist of a portfolio of hypothetical securities. These securities represent either a particular market or even a small but significant segment of the same market. The US Aggregate Bond and the S&P 500 Index are two of the most common benchmarks for the American bond and stock markets respectively.
A stock index is by far and large a very important part of the financial world. However, it is basically just a number that represents some of the top-earning shares from any particular stock exchange.
The FTSE 100 For example, represents the largest 100 joint-stock companies that are traded every day on the London Stock Exchange (LSE). If the share price of these companies will go up on average then the FTSE 100 will also inevitably rise with them. Conversely, if there is a steep drop in this collective basket of companies, the index will also automatically drop as well.
Some of the more important stock indices all over the world include the following:
There are two main systems for determining the overall value of any of the main financial market indices all over the world:
Most of the more popular indices are calculated via the capitalization-weighted average method. This system assigns value or weightage with regard to the size of each individual company that is part of the index. In other words, the more the total net worth of a particular company, the greater will be its impact on the overall share price of the index at a holistic level.
Not every index follows the same system. For instance, both Nikkei and Dow Jones are price-weighted indices. This means that stocks that are more expensive will have more influence than their lesser priced counterparts. In other words, a share option that is trading at $100 will be given ten times more weight than a share that is being traded at $10.
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