Stock indices in the stock market
The news and movies often show successful and wealthy people working on the stock exchange. It became interesting to me to understand this issue. Perhaps working on the stock exchange and the bets they make is not so difficult, but I'm just losing a financially profitable niche? Maybe you should read one or two articles, buy a couple of dozen shares or place bets, as they correctly call it, and get rich? We will learn what an exchange is, stock indices, how they work, consider examples from history, and get acquainted with new unknown words.
Stock indices and stock indices
Let's take a look at stock indices. DAX, SPY are stock indices. Let's walk through the classic definitions from textbooks.
The stock index is an indicator of the state and dynamics of the securities market. That is, there are people who sit on the stock exchange or in front of a computer at home and monitor the performance of stock indices. Securities are paper with an inscription and drawings on it. What is the value of such paper? The fact that a security is a paper, a document certifying, in compliance with the established form and mandatory details, property rights, the exercise or transfer of which is possible only upon its presentation.
Securities are the right to a share of total capital. Securities are: stocks, bonds, bills, checks. Securities facilitate the transfer of rights to material goods and other goods. Example: a company grows, begins to issue and use securities, and these securities begin to trade on the stock exchange, brokers closely look at stock indices and monitor their changes. When the company's indices fall, they buy the company's securities, and when the company's index rises, they sell the company's securities. The difference between buying and selling is what successful brokers make their fortune. We have considered, for example, the securities of some abstract company. And many companies in the stock market form the value of the stock market index. Not an index of a company's securities in some market. Namely, the index of the securities of the market as a whole on which these companies are listed. Hopefully you have grasped the difference and the level of abstraction in terms. A stock market index or a stock market index is an index of the entire market, not a single company that is represented on it.
Due to a change in the state of the stock market, a change in the present value of the index with its previous value, the market behavior is assessed. Assess the macroeconomic situation of the market.
And the company's performance is assessed by the company's macroeconomic situation, corporate events (can be covered at corporate website ), development, opening of a new representative office, mergers with companies, issue of new shares, takeovers, share splits, resignation and appointment of senior company employees or directors.
Securities are different and, as a result, their index characterizes different markets. The following types of market are distinguished: the industry market, the market for a certain class of securities, the market as a whole. Different indices show changes in different sectors of the economy. And the index itself can represent the national stock market as a whole (for example: the Chinese stock market) or a specific trading floor in this market. That is, it is no longer an index of changes in the company's securities, but an index of a certain site on which companies are placed. Or the index of the entire market, where several sites are located.
World Stock Indices
Now in the world there are a huge number of different stock indices. The most popular and well-known of them are indices:
Dow Jones (The Dow Jones Industrial Average, DJIA)
Founded by Charles Henry Doe in 1884. It was calculated based on the quotes of the 11 largest transport companies in the United States at that time - the index was called the Dow Jones Transportation Average. A couple of years later, the Dow Jones Industrial Average appeared, which united the main industrial companies in the United States. DJIA is now showing the average movement of the stock prices of the 30 largest industrial corporations in the United States.
S&P is published by Standard & Poor's (S&P) in two versions - for shares of 500 and 100 companies. This index is considered to be more accurate than, for example, the DJIA, because it represents stocks of a larger number of corporations. The shares of each company are weighted by the value of all shares.
NASDAQ (National Association of Securities Dealers Automated Quotation) provides insight into the US high tech market. NASDAQ is one of the three major US stock exchanges (besides AMEX and NYSE). Founded in February 1971 and located in New York. Today, more than five thousand high-tech companies are traded on the NASDAQ exchange. The most famous here are the NASDAQ 100 and NASDAQ Composite indices.
DAX (DAX 30 or GER 30) was introduced in 1988, and this hour is already the main stock index in Germany. Its calculation involves the share prices of thirty top companies from various sectors of the German economy.
FTSE (FOOTSIE, "Futsy"). The FTSE 100 index began to be calculated on January 3, 1984. It takes into account the quotes of shares of 100 companies with the maximum capitalization and included in the list of the London Stock Exchange (LSE) - the largest stock exchange in Europe, which has been operating since 1801.
Nikkei is the most popular Japanese index. Calculated as the arithmetic average of the stock prices of 225 Tokyo Stock Exchange companies.
Hang Seng is the main (capitalization-weighted) index of Hong Kong. Consists of 33 companies, their capitalization is 70% of the Hong Kong Stock Exchange.
MICEX and RTS - 2 stock indices, which include 50 of the most liquid and largest companies in Russia. The index includes such giants as Gazprom, Rosneft, Lukoil, Sberbank, Magnit, etc.
FDAX (fdax) - Deutscher Aktienindex Index - German stock index. Located in Frankfurt. It consists of 30 members.
Where do you go to place or trade in your IT company, you ask? Everything is very simple. You need to go to the S&P 500 or NASDAQ. Why? The S&P 500 hosts such IT companies with the largest weight in the index as Apple, Microsoft, Amazon, Facebook, Alphabet. I think this already says something. In 2019, the S&P 500 is up 29% year-over-year.
The NASDAQ stock exchange index, which mainly contains organizations from the field of high technologies (IT technologies), telecommunications, software developers, etc. in 2019 showed an increase of 35%.
Amazon became the leader of the IT market in 2015. At the beginning of the year, Amazon shares were trading at $ 308.52 per share, and by the end of the year they showed an increase of 115% - to $ 676 per share. The growth in the value of IT-market securities ranged from 30 to 145%.
What is an IPO
IPO - Initial Public Offering is an initial public offering, an initial public offering, IPO (ah-pi-o) - the first public sale of shares (securities) of a joint-stock company. Follow-on is an “additional placement” of shares, meaning that the company's shares are already traded on the stock exchange. The main goals of an IPO are to raise capital in a company, provide an objective assessment of the company's value on the market (the company can be used as a financial tool to assess the performance and motivation of managers, or a benchmark for mergers and investments), to capitalize the expected future income of the company (shareholders get the opportunity to sell all or part of the shares), to increase the liquidity of shareholders' capital (banks are much more willing to issue loans secured by the company's shares). After the IPO, the company becomes public, reporting is clear and transparent, which is a priority for most companies.
How to parse indexes
Changes in the stock index show a change for the better or worse in the activity and investment climate in the country. Studying the dynamics of indices helps market participants understand the impact on quotes of certain events. With the rise in prices for IT services, it is logical to expect the growth of quotations of all IT companies. But the shares of different companies grow at different rates (and some may not grow at all). The index helps to understand the movement of a market segment without going into the valuation of the many different companies that represent that market segment.
It is also necessary to analyze the indices, which include large IT companies, in combination with IT prices.
Futures is a contract (from the English futures contract or futures) or an agreement that obliges you to buy or sell an asset in the future at a fixed price within a certain period. The parties (seller and buyer) only agree on the price level and delivery time. There are also derivatives based on an index - for example, the S&P 500 (Standard & Poor's) index futures. Such contracts are used to invest or hedge risks.
If you want to receive additional income from the growth of the American economy. You just need to buy a derivative instrument (securities), the underlying asset of which is the US stock market. Moreover, you can also make money on the fall (in case of a decline in quotations) of the stock index by opening a deal to sell a financial instrument (securities) and then redeem it at a lower price.
Another example where the underlying asset is the stock market. The Hang Seng Index (of the Hong Kong Stock Exchange) declined 17% in 2018 due to the trade war between China and the United States after rising 40% in 2017. And after the financial crisis in 2007-2008, the S&P 500 index fell by 50% in two years, but the growth of the index for the last 10 years has exceeded 320%.
Stock indices calculation
4 methods for calculating indices
1. The oldest and most famous way to calculate indices is to calculate the arithma mean
2. A method for calculating a weighted arithmetic mean using various weighing methods.
3. There is a method for calculating the unweighted geometric mean.
4. Weighted geometric mean method. Used in the US stock market.
Any formula for the calculation will be useless if false, inaccurate or incomplete data are entered into it. For correct use in calculations, information must meet the following criteria: sample size, representativeness of the sample, weight, objectivity of financial information. Most of the indices are calculated during the trading day. And their updated values appear at short intervals.
Stock indices are convenient indicators of market change. It is enough to look at the indicators of changes in the stock exchange index and you understand what is happening with this or that country's economy.