Basic, Indices, Learn, Market

The Beginner’s Guide-What is an index?

What is an index?

The index, also known as the Stock Index or Stock Price Index. An index is a quantitative indicator that measures the performance of a stock market (or certain stocks in a stock market). The stocks included in a stock price index are generally referred as the “Constituents” of the stock index.

Simply put, it is to use a number to reflect the current market/industry changes.

Investors can better understand the overall performance of the market by comparing the value of the stock index over different periods. In general, an increase in the stock index means that the stock market is rising (the market is getting better), and a falling index means that the stock market is falling (the market is getting worse). In addition to show the current changes of the stock market, the stock price index is also a barometer of the industry outlook and the overall economy. For example, the US Nasdaq Index can be used to measure the performance of the US technology industry. Another example is the CAC40 index of France, which can show the economic performance of France and even the whole of Europe.

What are the factors that affect the index price?

The index price can be affected by a various factor, including:
1. Economic news
Investor sentiment, central bank announcements, employment data, or other economic events that may affect underlying volatility of the index prices
2. Company financial report
The profit or loss at the company may lead the inclines or declines of the index prices. Therefore, investors should pay attention to the financial reports of the companies, especially during earnings season.
3. Company announcement
Changes in company management or a potential merger could affect the index price, which could have a positive or negative impact on the index price
4. Changes in constituent
When constituents are added or removed, the index price may change, as traders adjust their positions based on the new constituents
5. Commodity prices
Various commodities will affect the prices of different index. For example, 15% of the constituents in the UK100 are commodity stocks, which means that any volatility in the commodities market may affect the index price.

What are the types of indices?

There are many types of indices. But there are mainly two types:

National Index

National index, which mainly covers most of the country’s important constituent stocks. Therefore, we could analyze the state of the country’s market economy by observing this type of index.
Example: HK50, SP500, etc.

Sectoral Index

Sectoral index, which mainly refers to constituent stocks that cover a specific industry. We could judge the current development of the industry through the analysis of the relevant industry index.
Hence, if you invest in individual stocks, of course, you also need to pay attention to the fluctuation of the industry index related to that stock.

Major World Index

United States: DJ30, S&P500, NASDAQ
Japan: JPN225
Europe: UK100, GER30, FRA40.
China: SSE50, CHINA300, SZSE100, CSI500.

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