To say it simpler, an index can be defined as a portfolio of stocks listed on a stock market. Most major economies or developed countries have at least one stock exchange or financial index. The Dow Jones, S&P 500, Dax 30 are examples of indices. If most stocks value go up, then generally speaking the value of an index will also rise.
Big companies impact the index more
Since the performance of an index is based on the capitalization weight of a stock, it means that companies which have higher share price, influence the performance of the index more than the smaller companies.
WHAT DRIVES INDICES PRICE CHANGES?
At the most crucial reason, supply and demand in the market decide on stocks prices.
Price multiplies the number of shares (market capitalization) is the value of a company. Comparing just the prices of two different companies does not give you a right insight. The trader needs to know what part of the market a certain company occupies.
Theoretically, earnings are what affect the valuation that investors have about the company. There are of course other indicators that are used by investors to have a future idea over the movements of stocks price. And exactly, it is investors mood, sentiment, attitudes, responses towards certain stocks and their expectations that affect stock prices.
There are many theoretical explanations over how the stock’s price move, their fluctuations and the periods of time they happen the most. But, up to now there is no a general theory which can explain everything over the behavior of all the stocks under one index.
INDICES TRADING HOURS
MOST POPULAR INDICES
Dow Jones Industrial Average - It tracks the prices of 30 large, publicly traded US companies. It also called US30.
S&P 500 – A group of the 500 largest US stocks, including around 80% of US market capitalization. This is why this index is considered as a good indicator of US economy performance.
DAX 30 - It is seen as the barometer of German economy. It tracks 30 major German companies.
Nikkei 225 – Nikkei consists of 225 top rated Japanese companies from the Tokyo Stock Exchange, including brands like Toyota and Panasonic.
EURO STOXX 50 - The EURO STOXX 50 is considered as an indicator of European economy. It includes 50 largest companies in the Eurozone.
FTSE 100 - Includes 100 stocks of the London Stock Exchange. They are focused to earn the revenues outside the UK, so it cannot be considered as an indicator of UK economy performance.
CAC 40 - Includes 40 companies of Euronext Paris Exchange, it is considered as a benchmark for French stock market.
Hang Seng – It represent the Chinese economy and the wider Asian market. There are included 50 largest companies by market capitalization on Hong Kong stock market.
ASX 200 - Includes 200 stocks on the Australian Stock Exchange. The biggest sectors in the ASX 200 are financials and materials sectors which affect the most the performance of the index.