Stock indices can be viewed as portfolios of securities grouped according to different characteristics and by virtue of different parameters. Precisely because of the different weighting systems used, securities acquire different weights within stock indices.
Since each index expresses the performance of the stocks included in it, improvement in the market performance of listed companies will also correspond to improvement in the performance of the stock index, and vice versa. In many cases, the relative change in the indices is more important than the numerical value (to the points) scored.
As will certainly become clearer in the following lines, the composition of stock indices varies depending on the benchmark being considered. Based on the criterion chosen, an equity index can be:
The composition varies according to the price of the stocks contained in the index; the higher the price of a stock, the greater its weight. Although they are simple to calculate they run the risk of not fully representing the general trend because a disproportion is made in favor of the more expensive stocks that are better represented;
These stock indexes are based on the market capitalization of listed companies. They are periodically adjusted and adjusted after corporate transactions but have the advantage of fairly representing all stocks. They are the most widely used stock indexes in the market.
The weighting factors are equal for all stocks in the index. The capitalization of the companies is irrelevant and they all have the same weight;
In addition to being based on these 3 criteria, indexes can also be made up by sector (such as Nasdaq), or by geographic area (such as global and national indexes).
There is also a final type to consider: that of sustainability indexes. These consider securities on the basis of different criteria than economic-financial criteria. They generally group together the stocks of companies considered the best in sustainability and CSR.
Stock index of the 100 companies with the highest capitalization listed on the London Stock Exchange. Components in and out of the index are determined every 3 months.
Stock index of the 30 largest capitalization stocks on the Frankfurt Stock Exchange. Taking into consideration few companies does not necessarily represent the vitality of the economy.
Stock index of the 40 most significant stocks by capitalization among the 100 largest listed on the Paris Stock Exchange. Although the 40 companies are French, 45 percent of their shares are in the hands of foreign investors. IBEX 35: stock index and leading indicator of the Madrid Stock Exchange. It includes the 35 largest stocks by capitalization.
Main stock index of the Italian Stock Exchange that includes the 40 largest Italian companies by capitalization. It was created by the merger between Borsa Italiana and the London Stock Exchange, a move that led to the creation of the London Stock Exchange Group.
In addition to the major European stock indices, it is also worth mentioning the Asian and American stock indices. To the east we find the Nikkei 225, which is rather broad compared to European peers in that it includes the 225 largest Japanese stocks by market capitalization.
In Asia we then find the Shanghai composite, which takes in all stocks in the Chinese market. It is divided into SSE 380, SSE 180 and SSE 50 depending on the number of companies considered.
Also worth mentioning is the Hong Kong Hang Seng, which consists of 50 companies representing 58 percent of the capitalization of the entire Hong Kong Stock Exchange. Finally, among the Asian stock indexes, one cannot leave out the South Korean KOSPI, which refers to more than 780 companies including Samsung and Hyundai.
The major U.S. stock indexes are 3: Dow Jones, S&P 500 and Nasdaq. The Dow Jones Industrial Average (DOW 30) is composed of 30 stocks but, contrary to what we have seen so far, it does not refer to capitalization of listed companies but to stock prices.
The S&P 500 originated in 1957 at the hands of Standard & Poor’s. Again, the benchmark is the capitalization of the 500 largest U.S. companies: because of its size, it is the leading benchmark stock index in the U.S. markets.
Finally, we have the Nasdaq Composite, which, of all equity indices, is the benchmark for Wall Street tech stocks.