How do participants in the financial markets use the most popular stock indices to their advantage? In order to answer that question, it’s essential to examine what indices are, how they’re calculated, and what kinds of economic forces cause them to rise and fall. Additionally, anyone who intends to use one or more of the major indices to make trading decisions needs to know about the Big Five, namely the ASX, DJIA, FTSE, the S&P 500, and the Hang Seng.
For decades, many have used market indices to follow general price levels of large groups of assets. Most of today’s versions show one price point for a large basket of assets, like stocks, precious metals, or commodities. The goal is to show how a particular sector of the market is performing. However, there are different ways of approaching the broad-based data. For instance, the S&P 500 attempts to evaluate the financial performance of a very wide base of stocks, while some index charts only look at individual segments or niche industries, like technology or energy. For many investors, index trading based on the value of an entire exchange is an attractive proposition.
In general, to arrive at an index’s value, you average the prices of all its components, giving more weight to some components than others. So, it’s important to remember that the FTSE, the DJIA, and others are much more than simple averages. In most cases, higher priced securities carry more weight when calculating the final numbers. What causes a given index to rise or fall? Depending on what it measures, just about any economic factor can have an effect. Using the FTSE as an example, the inflation rate in the UK, as well as that nation’s overall economic health, can have a direct impact on the index’s value at any time. The same is true for the other members of the Big Five club, each of which is discussed in more detail below.
The Dow Jones Industrial Average has been in use since 1896, and is composed of the 30 most important company stocks in the U.S. It’s weighted by price and is sometimes faulted for only including a small number of corporations. Commonly referred to as “the Dow”, the DJIA is rarely used in isolation. Instead, investors view it alongside other measures of marketplace performance.
The stocks in the Financial Times Stock Exchange 100 represent the UK’s most heavily capitalized companies. The FTSE is considered one of the key barometers of the health of the European economy as a whole.
The Standard and Poor’s 500 is a U.S.-based measure of the biggest 500 companies in the nation. Globally, it is said to be the leading indicator of not only the state of the U.S. markets but also the overall health of the global economy.
Officially called the S&P/ASX 200, the value measures the general performance of Australia’s 200 companies based on capitalization. All told, the listed companies on the ASX account for more than 80 percent of Australia’s total capitalized share value.
The HSI measures the average performance of the entire Hong Kong securities market and is employed by people all over the world who look to the 50 component stocks as a clear indicator of how the area’s economy is performing on a day-to-day basis.