The stock market index mostly takes note of the ups and downs of the charts of some chosen groups of bonds, shares, and other sorts of investment security. This makes the index a major part of share and stock investing.
One can be curious to know about how the world stock index works. In fact, one should also know how stock market investment puts the capital at risk.
What is a stock market index?
If one digs into the history, then the world’s first index came in July 1884 and it was published in the US. It was comprised of 11 transport stocks and among them, there were 9 railway companies, a telegraph operator, and a steamship company.
How is a stock market index constructed?
Every stock market index has its formula when it comes to deciding on which companies they will include. The indexes which mostly focus on the performance of the wide sweep of the share market can include only high-ranking companies in terms of market capitalization. Sometimes, the companies in an index are selected by the committee and represent all the shares that trade on any particular stock exchange. There are some indices that also focus on companies that operate under the same industrial sector like healthcare or technology.
Once the companies are decided, then the compiler needs to determine how these companies will be represented. There is another important factor known as the ‘index weighting’. Depending on how this weight has been attributed the companies which are included can have an equal impact on the index performance or else their impact can be based on the considerations like share value and market capitalization.
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The major used weighing methods are:
Market capitalization
Here the index represents the stocks with the largest market caps. If the company is large, there is a great impact on the performance.
Equal-weighted
The index is constructed on the basis that all the participants are treated the same. Each of the companies’ performances can affect the index.
Price-weighted
It gives the greatest weighting to those companies which have the highest share prices.
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The major Indexes
When looking for NSE top gainers, here are the major indexes that one must know about.
- The Financial Times Stock Exchange 100 lists the 100 largest companies in the UK that makes up the London Stock Exchange. Stocks with higher market caps have more weight here.
- S and P 500 Index tracks the performance of the top 500 US companies as determined by S and P Dow Jones Index. This is also a market capitalization-based index.
Dow Jones is a very familiar name in the share market world. The index here tracks the performance of only 30 US companies and here only blue-chip companies are a part where there is a history of strong financial performance. One has to be aware of that.
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