The Global Stock Market has spawned 100s of Stock Market Indices
In economics and finance, an index is a statistical measure of data. Stock Exchanges throughout the world have introduced Indices to "monitor" market progress.
Financial indices (such as the Dow Jones Industrial Average) track the performance of selected financial data and display the results in a mathematical form and/or graphical form.
Economic indicators are a statistical analysis of economic activity. For example, the consumer price index tracks the variation in price of a basket of consumer goods.
Stock Market Indices are a representation of a basket of shares in a particular Stock Market. They are usually best illustrated in graphical form.
They are useful tools used by financial experts and amateur investors alike, to measure the performance of either the market as a whole, or some sub-section of that market.
A lot of Investment Trusts (Mutual Funds in the US) and Exchange Traded Funds try to "track" indices. Some come close and any difference in a fund's performance is referred to as a tracking error.
There are also some very useful economic indicators and some real quirky indicators that will amuse you.
Stock Market Indices can be made up to suit any market.
There are basically three types of Stock Market Indices:
We find the UK market and the US market more than enough to keep track of. But we keep a beady eye on most others.
And within each country there are a plethora of other indices that measure 30 top companies, top 100 companies, the top 500 companies, all companies, sectors, commodities, the economy, and the list goes on.
We monitor the top Stock Market Indices and even trade them from time to time. But that's another story.
Stock Market Indices are also "weighted" in different ways.
They may be "price-weighted" which means that the price of each company within that index is the only consideration when calculating the Index. The Dow Jones Industrial Average is one such weighted Index.
And then there are "capitalization-weighted" Indices which means that the size of the company is taken into consideration when calculating the Index. The S and P 500, the FTSE 100, and the Hang Seng Index fall into this category.
The Barron's 400 Index is an "equal-weighted" Index whereby all components are given the same value. For example, every one of the 400 stocks in the Barron's 400 Index is given an equal 0,25% value (0,25% x 400 = 100%).
Most indices are weighted by market capitalization (i.e. the share price multiplied by the number of shares available). It seems commonsensical to us that companies with a higher market value get a bigger weighting in the Index
It can be interesting to compare one index against another.
For example, how is the FTSE 100 performing relative to, say, the Dow Jones? This is easily done with Stock Trading Software at the push of a button.
But we're getting ahead of ourselves again. Back to indices.
Before we can start comparing one index against another, let's describe what the world's main indices are - starting with Global Stock Market Indices.
The MSCI World Index tracks large and mid-cap equities across 23 developed countries. This index does not include any emerging markets as they would be seen as having too small a market capitalisation.
Regional Stock Market Indices track equities from specific regions around the world, for example: Europe, Asia, America. Prvate investors like ourselves can then compare our local markets with a particular region.
National Stock Market Indices cover individual countries. In the well-developed countries, most of these indices will contain large-cap stocks but in less developed countries the constituents will be largely small-cap companies.
Here are the most common Global, Regional, and National Stock Market Indices:
United States of America
Plenty there for you to get your teeth into.
We reckon that by analysing the various indices you may stumble across some that are trending against their counterparts. If your chosen markets are in decline (i.e. in a bear phase) this could be a suitable time for you to switch into an Exchange Traded Fund that tracks any up-trending index that you may have spotted.
Probably. It depends how you want to use them. We find them useful for spotting trends.
The FTSE 100, for example, is the common way of viewing the UK market today.
Yet, it only represents the 100 of the largest companies in the UK. Four-fifths of the UK All-Share Index.
Furthermore, the FTSE 100 is a capitalization-weighted Index. Which means that a heavily capitalized company could be 30 times (or more) larger than a smaller capitalized one.
The FTSE 100 was only introduced in 1984. Before that, the FT Ordinary Index (formally known as the FT 30) was the 'bell-wether' Index. It might have shown the trend of the market but, in our humble opinion, was not a true representation of the market as a whole. How could it have been - it only had 30 constituents?
The FTSE 500 is more accurate, but represents only four-fifths of the market.
However, it is a GOOD indicator of the market trend.
not a very accurate one.
The FTSE 100 excludes two important factors: Inflation and dividends.
Over a long period, these can make a gargantuan difference.
Over the long term it is dividends that matter more than price increases. Price increases are only for short term benefit.
The Dow, on the other hand, weights companies by price and not market capitalization. This comes about because when Charles Dow introduced this Stock Market Index in 1896, it only comprised of 12 companies.
how's this for simple: Dow added all the companies' share prices
together and divided the total by 12 - thus producing the value of the
index. Crude or what?
There is an obvious confusion with a price-weighted Index. Some companies are valued much higher than others.
Nowadays, the Dow consists of 30 shares. The problem today is that a constituent could be priced at, say, $250 (and not necessarily a large market capitalization) but Apple (which is one of America's biggest companies) could be priced under that $250.
how's this for odd: the Wall Street Journal gets to choose which 30 companies are in the Dow.
Wherever the Dow is today - it surely is meaningless. Certainly in our eyes.
The S and P 500 is a much better yardstick.
Strange name, isn't it? The Baltic Dry Index (BDI) is a measure of freight rates in the global dry bulk shipping market.
It is calculated daily. Readings are generated by a panel of international shipbrokers who gauge pricing conditions over about two dozen major transport routes.
[In fact, a series of shipping
indices are published daily. In addition to the Baltic Dry Index, there
is the Baltic Capesize Index, the Baltic Handymax Index, and the Baltic
Dirty Tanker Index].
The BDI is, in simpler terms, a measure of the cost of transporting raw materials.
Low levels of the Baltic Dry Index in 2005, 2011, and 2015 led to shares doing well in the following 12 months.
Conversely, the BDI hit a record high in May 2008 - immediately prior to the market falling.
It could be that shares over-react to how the world economy is doing. When times are good (i.e. robust economic activity is raising shipping costs), shares get too high and when things are not so good, shares get too low.
The S and P 500 Index is the main indicator in the world's biggest economy - America.
Markets in developed countries follow it.
Financial and Technology stocks dominate. They alone account for about a third of the market.
Care is probably the next biggest group closely followed by Consumer
Services (retail, media, travel and leisure). These two sectors are
recognised as defensive sectors and are much less "up-and-down" than
other sectors. However, together, these two sectors account for about a
quarter of the market.
Industrials and Consumer Goods share about 20% of the market.
Oil and Gas sector takes up about 10% of the market.
The UK FTSE-100 Index (affectionately known as the "Footsie") is a strange representation of the UK market.
constituents make aroud 70% of their combined sales overseas. That can
be dangerous, since any fluctuations in the value of Sterling could
have a major impact on profits and dividends.
Furthermore, the Index is exposed to commodities. Oil and Gas and Basic Materials (such as miners) make up around 30% of the market. Which is a higher proportion than other developed countries.
That could go towards explaining why the FTSE 100 has fallen behind other major indices in recent years.
Banks and Insurance companies make up over 20% of the total.
The defensive sectors, Consumer Goods and Health Care account for almost 25% of the market.
We treat the FTSE 100 as just a number. Individual shares are our bag.
Economic Indicators are a statistical comparison of economic performance.
For example, the business cycles could be highlighted using various Economic Indicators.
The list of Economic Indicators is almost infinite. Here are just a few examples:
And many, many more.
Stock Market Indices and Economic Indicators tell us a great deal but there are some real Quirky Indicators out there that we just can't take too seriously.
Have you ever heard of the Big Mac Index?
Or the Hemline Theory?
Or the Lipstick Indicators?
Nope? Neither had we until we stumbled cross them one day. We regard them as superstitious and co-incidental. But alas, there is some correlation between them and the markets.
Such indicators are a bit of a joke to us but some professional advisors use them. We're not professional advisors and we will not be using them.
You can judge for yourselves. Just hit the link at the beginning of this section.
Stock Market Indices are the standard method for monitoring how a market is performing.
However, just because a particular index is moving up (or down) is no guarantee that ALL the constituents of that index are doing the same thing. But, if the trend of a particular index is in one direction it's fairly true to say that all constituents of that index will follow suit - if not immediately, then eventually.
We like indices for the "30,000 foot view" but that's all. We're much more interested in individual companies.
For those readers that have perused our website in any detail, will know that we like "numbers". We're not just talking about Stock Market Indices but Financial Ratios, Economic Indicators, and even Quirky Indicators.
You can glean a lot from ratios and indicators.
You dont have to be any good at maths, you just need an appreciation of quantities and their relation to the topic in hand. All the grunt work will have been done for you. You just have to relate them to what you are investigating.
We do also track a lot of national indices to see if any are "bucking the trend". We have found quite a few that fit this criteria and if we are out the UK or US market because it is in decline, and we spot a market that is trending up, we would search for an Exchange Traded Fund that tracks that index.