You may have already heard of stock indices such as the FTSE 100, the Dow Jones or the Nikkei 225. Numbers often quoted on the news, or in the business section of the newspaper, usually alongside a value saying how much they've moved up or down.
But what are they? And what do they represent?
A stock index is a measurement of value of a certain section of the stock market.
This 'certain section of the stock market' can be:
The FTSE 100 for example, is a number representing the largest 100 companies traded on the London Stock Exchange.
If, on average, the share price of these companies goes up, then the FTSE 100 will rise with them. And if the share prices fall, it will drop.
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Stock indices give traders and investors an indication of how an exchange, region or sector is performing.
The ASX 200 for example, tracks the performance of 200 of the largest companies in Australia. If the ASX 200 starts to rise, then on average these companies are performing well. A rising ASX 200 tells investors that, generally, the state of the Australian stock market is improving
And if the Australian stock market is on the up, then more often than not, the entire Aussie economy tends to be doing well. So, movements in the price of major stock indices can often give traders an indication as to the health of an entire country.
That's important information when planning your next trade.
Most nations have one major stock index that represents the largest companies in that country. For example:
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However, in the US there are several major indices, all based on slightly different sections of the market. The three main US indices are:
One of the oldest and most quoted indices, the Dow Jones Industrial Average represents 30 of the most influential companies in the US. It was first calculated in 1896 and historically was made up of firms involved in heavy industry. Nowadays this association has been all but lost.
More diverse than DJIA, the S&P 500 is based on the value of 500 of the largest US shares listed on either the New York Stock Exchange (NYSE) or NASDAQ. It was first used in its current form in the 1950s and today represents around 70% of the total value the US stock market.
Established in 1985, the NASDAQ 100 is based on 100 of the largest non-financial companies listed on the NASDAQ exchange in New York City. It represents firms across a number of sectors, but in particular computing, telecommunications and biotechnology.