What are indices and why are they relevant in investing?
An index is a basket of securities that represents the investment market of a country, region or industry.
The best-known indices (including DAX, S&P 500, Dow Jones) are stock indices, but there are also indices for other asset classes.
An index can be used to show the average development of an investment market.
A stock index, or index for short, a basket of securities representing the investment market of a country, region or industry. Indices can therefore be used to show the average development of a market. Different countries, stock corporations and industries can thus be compared very well with each other through an index. A stock index thus provides an overview of the general price performance of several stocks or other securities. The DAX, for example, is the largest German stock index and includes the 40 most important German stock corporations. In addition to stock indices, there are also indices for bonds, real estate and even commodities. Indices are often offered and calculated by large stock exchanges, independent index providers, but also partly by rating agencies. The best-known index providers include MSCI, S&P/Dow Jones, FTSE and STOXX.
A distinction is made between price-weighted and capitalization-weighted indices. In the case of price-weighted indices, the share prices of all stocks included in the index are added together and then divided by the number of stocks in the index. One of the best-known price-weighted indices is, for example, the Dow Jones Industrial Average. And is there a disadvantage? Yes, stocks with a high price are more heavily weighted in the index, while stocks with a low price are weighted less, making it more difficult to assess where index performance really originates.
The DAX and the S&P 500 belong to the group of capitalization-weighted indices. The weighting in a company's index is proportional to its market value, which is calculated by multiplying the number of shares issued by the current stock market price.
| Name | Country/Region | Description |
|---|---|---|
| MSCI World | Global | The approximately 1,500 largest listed companies by free float in a total of 23 industrialized countries. |
| MSCI Emerging Markets | Global | The approximately 1,400 largest listed companies by free float in a total of 25 emerging markets. |
| MSCI ACWI (All Countries World Index) | Global | Includes all companies from the MSCI World and the MSCI Emerging Markets |
| Dow Jones Industrial Average | USA | 30 major U.S. companies, weighted by price per share, among other factors |
| S&P 500 | USA | |
| Nasdaq | USA | The 100 largest publicly traded U.S. IT companies by free float |
| Euro STOXX 50 | Europa | The 50 largest listed European companies by free float |
| DAX 40 | Germany | The 40 largest listed German companies by free float |
| FTSE 100 | United Kingdom | The 100 largest listed UK companies by free float |
| Nikkei 225 | Japan | The 225 largest listed Japanese companies, weighted by price per share, among other factors |
First and foremost, the share prices as well as the weighting of the shares contained therein influence the behavior of a stock index. If a large company is included at a higher percentage, then this company influences the entire "basket" more strongly than other stock corporations. In the calculation, a distinction is made between price index (also called price index) and performance index. For price indices, only the share prices of the compiled companies are used for calculation. In the case of performance indices, on the other hand, possible dividend payments are taken into account in addition to price changes. It is assumed that dividend income is reinvested in shares of the index. As a result, a performance index will always perform better than a comparable price index.
💡 Tip
In the Bavest Plattform you can select indices directly on the home page and thus always display and compare them.
Disclaimer: No investment advice or purchase recommendation
Which key figures should you know? How do you use them in stock analysis?
