Stock index is an indicator of the state and dynamics of the securities market. Depending on which securities constitute the sample used in the calculation of the index, it can characterize the market as a whole, the market for a specific class of securities (government bonds, corporate bonds, stocks, and so on. P.), an industry market (telecommunications, transport, insurance, Internet-sector and t. n.). Stock indices are calculated and published by various organizations, most information or rating agencies and stock exchanges.
Methods of determining the stock market indices
In order stock index adequately reflects the processes occurring in the securities market, and as little as possible dependent on subjective factors, such as the manipulation of prices of certain financial instruments, corporate policy issuers, including new issues, split or consolidation of shares, issue of warrants, etc. n., it is necessary to apply the correct and reasonable method of calculation of stock indices. In addition, understanding the methodology for calculating the index is necessary for the proper interpretation of the changes.
While determining the method of calculation of stock indices you should consider the following questions:
- formulas for calculating stock indexes;
- the accuracy and completeness of the information used during the calculation of stock indices;
The requirements for the information used in the stock indices calculation.
Any formula would be useless if inaccurate or incomplete data will be entered. Calculation should meet the following criteria:
- sample size. It is advisable to use in the calculation of the index of a sufficiently large number of companies to reduce the probability of impact on the final result of random variation in the value of securities of individual companies relative to the average market value.
- representativeness of the sample. The list of companies whose securities are included in, for example, the sectoral index must be sufficiently complete to ensure that the index adequately reflects the state of a particular segment of the economy.
- objectivity of the financial information. Note that the stock index is calculated based on publicly reported information on changes in prices of financial instruments. Most indices are calculated during the trading day, and their updated values appear at short intervals.
Major stock indexes
Dow Jones index. The most famous in the family uses the index Dow Jones Industrial Average (the average industrial Dow Jones). The index was first published in 1884 by Charles Dow, founder of the company.
The NASDAQ 100 – an index of the 100 largest non-financial sectors on the NASDAQ stock exchange.