Stock indices: What they are, what they are for

they serve, types and examples

 What is a stock index?

A stock index is an indicator that shows the

variation in the price of a set of listed assets that meet
certain characteristics.
The oldest stock index that is still being updated today
it is theDow Jones Transportation Averagemade up of 11 companies
of transport, 9 of them from railways. This index was created on
July 3, 1884 byCharles Dow, the historical journalistand founder
ofWall Street Journalthat helped shape the markets as they
we understand today.
 What are they for?
First of all, stock indexes serve as a reference to know
the general behavior of a certain type of assets.
Related to the previous function, stock indices are used
benchmark base for determining profitability
relative to fund managers and individual investors. For example, if
an investor has had a return of 15% over one year, in
the beginning is a figure more than acceptable. However, if that same year the
the stock index in which he/she invests would have increased by 30%, his/her profitability
relative would have been quite mediocre.
Finally, stock indices serve as a reference for investment.
passive. Passive investment funds or indexed ETFs will only have
to replicate the stock indices to obtain their same return
brutal.
 Types of stock market indices
There are different classifications of stock indices. Here are the three classifications.
more common.
Due to the geographical origin of its assets:
• National indices, composed of assets from the same country.
• International indices, composed of assets from one or several foreign countries.
• Global indices, composed of assets from around the world.
Due to the type of companies they contain:
• Sector indices, composed of companies from a specific sector.
• Intersectoral indices, composed of all types of companies.
Due to the type of assets they contain:
• Equity indices, composed of stocks.
• Fixed income indices, composed of bonds and obligations of all kinds.
• Commodity indexes, such as oil, gold, silver, etc.
Examples of the main stock indices in the world
Main US stock indices
Dow Jones Industrial Average: Better known as Dow
Jones or simply Dow. It is made up of 30 companies.
Americans.
S&P 500: It is an index composed of 500 of the largest
companies both from the New York Stock Exchange (NYSE) and from the
Nasdaq.
Nasdaq 100: It is the stock index composed of the 100
largest non-financial companies of the Nasdaq. It is
largely composed of technological values
Main European stock indices
• Eurostoxx 50: Main European stock index. It includes the 50 largest companies.
important ones of the eurozone by capitalization and trading volume.
• DAX 30: Main German index with the 30 most important companies.
Frankfurt stock exchange.

• FTSE 100: London stock index with its 100 largest companies
important. It was created by the Financial Times newspaper.
• CAC 40: Index of the 40 main companies of the French stock market.
• IBEX 35: The main Spanish stock index with the 35 companies with the highest
capitalization and liquidity. The name 'Ibex' is an acronym for 'Iberian
Index.
Major Asian stock indices

• Nikkei 225: Main Japanese index composed of the 225 companies with the largest
liquidity of the Tokyo stock market. It was created by the Nihon Keizai Shinbun newspaper.

• SSE Composite Index: It is the most important Chinese stock index. It is composed of
all the companies listed on the Shanghai Stock Exchange.
• BSE Sensex: Main stock index of India. It is composed of the 30 companies
more important ones that are traded on the Bombay Stock Exchange.

• Hang Seng Index: Main stock index of Hong Kong. It has 33 companies.
It was created by Hang Seng Bank.
• KOSPI: It is the main South Korean index. It includes all the listed companies.
in this market weighted according to their market capitalization.
Main stock indices in South America

• Bovespa: The main Brazilian stock index. Composed of the 50 most important companies that
they are traded on the Sao Paulo stock exchange.

• CPI: The CPI (Consumer Price Index) is the main Mexican index. The magnate Carlos Slim.
it controls approximately one third of the value of the companies that make up the index.
• Merval: It is the main Argentine index with the most important companies on the Buenos Aires stock exchange.
• IPSA: IPSA is the acronym for Selective Stock Price Index. It is the main Chilean index.
It is composed of 40 shares.
• IGBVL: Main Peruvian index.
• IGBC Bogotá: Índice compuesto por las 36 compañías más representativas de Colombia.
• IBC Caracas: Main stock index of Venezuela composed of 16 companies.
• MSCI Latin America: Stock index that includes 137 companies from Brazil, Chile, Colombia, Mexico and
Peru.
Main global stock indices
• MSCI World: Index composed of more than 1,600 companies
from 23 developed countries.
• MSCI Emerging Markets: Index composed of more than 800
companies from developing countries.
• S&P Global 100: Index composed of 100 companies
multinational companies from around the world.
The Dow Jones Industrial Average is a price index
The price index par excellence is theDow Jonesthe oldest stock index of all that exist.
It was created in 1896 and originally contained the stocks of 12 major industrial companies. Of these 12
companies only one (General Electric) continues to be part of the 30 that make it up today.
The calculation of the Dow Jones Industrial Average (this is its full name) was quite simple a
century.Charles Dow(its creator) just had to calculate the average of the stock prices from the 12
companies at the end of each trading day.

As time passed, Charles realized that it was not going to be an easy task. Calculating the index value was
it was complicated due to the events taking place within the companies that affected, due to
so, at the price of their shares. There were companies that merged, others that went bankrupt and exited the
index, companies that entered it, companies that paiddividendsor companies that did unsplit.
Due to all these situations, especially the splits, Charles Dow decided to adjust the divisor.
so that the value of the index would not lose consistency over time.

Currently, to calculate the Dow Jones, the sum of all stock prices is not divided.
between 30 (the number of companies that make it up), but between 0.146.
This means that for every dollar the price of any stock varies, the index moves 6.85.
points (1/0.146).
 WORKSHOP:
In groups, they must research the main stock indices of
world and socializing: if they divide the research into work groups
assigned by zones in the world.
It must contain:
Origin
How it works.
Companies that make it up.
How to calculate a stock index?
Stock indices are measured in points, and these points depend largely
part of the prices of their stock values.

There are several ways to calculate them, but they all have in common that the
value of the index is based on a base. That is, at the moment it is created a
a certain value is assigned to the index and from there, this value starts changing
according to the price quotes of the values.

Of all the methods that exist to create an index, two stand out. In
one of them, the weight that the values within the index have comes
determined by the price of its shares and in the other, given by the value
of the market that they have of the companies.

Next, I will talk to you separately about the two methods.

Next, I will talk to you separately about the two methods.

Price-Weighted Index
These indices only take into account the stock prices of the securities and
it is calculated by adding the price of all of them and dividing by the total number
of companies constituting the index.

In other words, it is an arithmetic mean of the price of all the

stocks that make up the index.
The advantage of this type of index is that it is simple to calculate, but it has the
inconvenience that the values with the highest stock prices have
greater weight within the index and, therefore, have more influence on it
evolution, regardless of the importance of the companies
in the economy of the country or sector covered by the index.
 Example of index calculation according to stock prices
The index that we are going to calculate will be called Price Index.
The Price Index consists of 4 companies. The weight of each one of them
they within the index is determined by the price of their shares,
leaving as follows:
Company Action Ponderation
A 14 € 46.67%
B 8€ 26.67%
C 5€ 16.67%
D 3€ 10.00%
Total 30 € 100 %

To calculate the value of the Price Index, you first have to sum the quoted price of the
company stocks and second, divide the obtained result by the number of companies that
it consists of (30/4 = 7.50).
The 7.5 obtained could serve as a base, but if we prefer to start from a round number, then
example 100, it can also be done without any problem. I will explain it to you a little later.
 The next day the stock price changes:
Company Action Ponderation

A 16 € (+ 2 €) 50.00%

B 10 € (+ 2€) 31.25%

C 4 € (-1 €) 12.50%

D 2 € (-1 €) 6.25%

Total 32 € 100 %

To recalculate the value of the Price Index, we add the

price of the stock quotation and we return the result
divide by the number of companies (32 / 4 = 8).
Taking as a basis the previous 7.50 points, after the variations
from the stock price, the Price Index has increased its value by 0.50
points until reaching 8.

If we had made our first valuation of the Price Index (7.50 points) ...
converted to a base 100 because we prefer it to start from a round number,
to calculate the points that have moved from those 100 points,
we would have to find the divisor of 7.50 that gives us 100. When dividing 7.50
between 0.075 (divisor) we obtain the exact 100 points that we want the
index have the first day.

To calculate the points that the Precious Index has moved from the
100 after the changes in stock prices on the first day,
we divide 8 by the divisor (0.075).
In making this last calculation, we would find that the index has risen by 6.67 points,
now standing at 106.67, an increase of 6.67%.
Example
Based on the previous 7.50 points, after the variations of the
stock prices
First day: 7.5/100 = 0.075 benchmark to start with a base of 100 points.
(7.5/0.075=100) base reference.
On the second day, the Price Index has increased its value by 0.50 points, reaching
the 8.
Now: 8/0.075 = 106.7 points.
On the third day, let's assume an average of 9.
Now: from the previous 8/100=0.08 reference base of the 100 points.
So: 9/0.08=112.5
First day: 100 points.
Second day: 106.7 points.
Third day: 112.5 points.
Proposed exercises:
•Design 5 indicators supported by the previous method:
With 7 companies.
With 12 companies.
With 14 companies.
With 23 companies.
With 33 companies.
For three days of quotation in each indicator.
Example of index calculation based on market capitalization
The index that we are going to calculate now will be called Capitalization Index.
The Capitalization Index is made up of the same companies as in the example.
previously, with the same stock prices, but now we have
to calculate their market capitalizations by multiplying the number of
shares that each company has outstanding (the shares that can be
buying and selling freely in the market) at the market price of the
action.

Taking into account market capitalization, the companies in the Index

Prices weighed less, in the Capitalization Index they are the most important.
When taking into account market capitalization, the companies that
in the Index Prices weighed less, in the Index
Capitalization is the most important.

Number of shares
Capitalization
Company Action Weighting
stock market

A 14 € 100 1.400 € 6.09%

B 8€ 200 1.600 € 6.96%

C 5€ 1000 5.000 € 21.74%

D 3€ 5000 15.000 € 65.22%

Total 30 € 6300 23.000 € 100 %

The total market capitalization of the 4 companies is €23,000. This figure could serve us as
base value of the index, but in reality it occurs that the market capitalization figure of all
Companies have too many digits and this makes it difficult to follow their evolution.

If we want the Capitalization Index to start its journey at 1000 points, we have to
perform the same operation that we did in the example of the Price Index. Find the divisor
from 23000 so that the result gives us 1000 points.
In this case, the divisor is 23.
The next day, the stock price changes in the same way as in the example.
Price Index:

Company Action No. of shares

Capitalization
Weighting After the movements in prices
stock market
of the actions, the capitalization
A 16 € (+ 2 €) 100 1.600 € 9.09%
total stock market is now €17,600. This
B 10 € (+ 2€) 200 2.000 € 11.36%
we divide the amount by the
C 4 € (-1 €) 1000 4.000 € 22.73 % divisor (23) and we have that the index
D 2 € (- 1€) 5000 10.000 € 56.82% decreased from 1000 to 765.21
Total 35 € 6300 17.600 € 100 % points, a decrease of -23.48%.
 Stock index example:
1000 starting points

start 23000
23
2 period 17600 765.217391 down from 1000 points
download from -23%
for the next 17600 1000
now 17.6 new divisor
then
3 period 24000 1363.63636 rises above 1000
36%
we try the
increase 24000
Proposed exercise:
Action Company Number of shares Market capitalization Weighting
A 14 € 100 1.400 €
B 8€ 200 1.600 €
C 5€ 1000 5.000 €
D 3€ 5000 15.000 €
E 3€ 6000 18.000 €
F 4€ 6000 24.000 €
TOTAL
IN THE NEXT PERIOD THE BEHAVIOR
IT WAS LIKE THIS:
No.
Company Action Market capitalization Weighting
actions
A 12€ 100
B 9€ 200
C 9€ 1000
D 5€ 5000
E 2€ 6000
F 7€ 6000
TOTAL
IN THE THIRD PERIOD
No.
Company Action Market capitalization Weighting
actions
A 13€ 100
B 10€ 200
C 10€ 1000
D 6€ 5000
E 3€ 6000
F 8€ 6000
TOTAL
DEVELOPMENT OF THE PROPOSED EXERCISE:
Proposed Exercise No. 2
In a stock market, three financial products are traded:
The company susu SA issued 200 shares at a price of 20 usd.
The company titon SA in its first stock issuance placed 2000 at a
price of 8 usd.
The company Chacha SA issued 4000 shares in the primary market at a
price of 7 usd.
For the second day, the only company that recorded a rise was Chacha SA 4.
USD poor action. The others maintained the same behavior.
On the third day, the company susu SA suffered a decrease of 2 USD per share, the
the others remain the same.

Tabulate and record the indicators.

Development of the proposed Exercise No2