Indices use a portfolio of representative companies (usually spanning major industries) to reflect
the status of the whole stock market. There are basically three kinds: global, regional and
national. Global indices include companies regardless of where they are traded. Regional
indices include companies from a certain region and national indices include companies from a
specific nation. Indices are used to get an indication of the market's overall direction. Some
analysts use them as a barometer of the underlying economy.
Indices can be composed of tens to hundreds of stocks and each index calculates the weighted
average differently. Some weigh the stocks equally (equal weighting), others take company size
into account (capitalization weighting) and others use a hybrid method (modified capitalization
weighting). Stock Indices are tradable entities themselves. A currency index is a measure of the
value of a specific currency relative to other select currencies. Indices like the US Dollar Index
or the Euro Currency Index are used to gauge the strength of those respective currencies.
The main stock indices are managed by the exchanges of developed countries. The S&P 500
(SPX), Dow Jones Industrial Average (DJI) and Nasdaq Composite (IXIC) are the world’s
largest indices based on the market capitalization of their constituents. The name of the index
usually indicates the number of its constituent companies. For instance, The Nikkei 225 (NI225)
represents 225 companies and is widely seen as a leading indicator of Japan’s equity market.
The value of an index is usually calculated based on either the prices or market capitalization of
its constituents. They are called price-weighted index and capitalization-weighted index. Many
investors pay close attention to major indices as they often show the state of the entire
economy.
