Index numbers are statistical tools that make it possible to measure the relative change experienced by a variable during a certain period; that is, the variation in price, quantity or value between some previous point in time (base period) and a given period (usually the current one)
Stock indices are index numbers that reflect the evolution over time of the prices of securities quoted in a market.
The sample of assets that make up the index obeys certain criteria of choice that generally have to do with the volume traded and the market capitalization.
Since there are different types of listed securities (shares, derivatives), different types of indices can be calculated, although the best known are those that refer to shares.
The indices can assume partial groupings of values (sectorial) or global (general).
Technically they are complex temporal index numbers and in most cases weighted.
The purpose of the stock indices is to reflect the evolution over time of the prices of the securities admitted to trading on the Stock Market.
In short, they try to reflect the behavior of all the securities listed on the stock market taken together as if it were a single unit.
Importance
The importance of stock indices lies in the ease of handling the information, in other words those involved in the stock markets do not have to remember large price lists or exaggerated amounts of information, with a single number they summarize the work a day's work; this offers less effort in understanding.
In the same way, the indices are merely applicative and not theoretical, since their base is in the real behavior of the stock market, which offers a much safer panorama in decisions.
goals
- Provide investors and advisers with an easy-to-understand and impartial tool for making decisions; Keep an effective record of the movement of transactions carried out; Analyze by comparing histories between different periods; Relate different investment instruments in a single measurement parameter; Provide a panoramic image of the entire stock market movement without having to analyze the operations in detail; They represent the evolution of a specific market; Try to summarize the general behavior of prices in a figure, which is easy to read, analysis and understanding;
Elaboration
Although in general all the indices carry the same objectives and the same definition, their elaboration tends to change, this because their calculation can be of the Arithmetic type where simple Addition and Subtraction are used for their calculation, assigning a standard score to the instruments or companies that are taken into account for its calculation, and then carrying out a simple addition or subtraction in order to find the possible variations; Geometric type where the operations used are the Division and Percentage Multiplication of the points assigned to the instruments and selected companies; finally, a combination of both measurement parameters can be carried out by performing alternating operations between arithmetic and geometry.
The veracity and objectivity of each one will depend on many factors, among which we can mention:
- Size and type of market; Size and type of instruments or participating companies; Specific objectives for using the index; Number of instruments or companies used for the analysis.
International Financial Indicators
Dow Jones Industrial Average Indices
The DJIA is a weighted average of the prices of 30 stocks of companies identified as "blue chip" (recognized for the quality of their products and services, their reliability and their ability to operate efficiently) that are listed on the New York Stock Exchange (NYSE).
This index was created in 1896 by Charles H. Dow, being the oldest stock indicator that is still in use.
Despite the small number of companies that comprise it, this index fairly reliably follows market developments; since it only reflects the evolution of the largest companies and without taking dividends into account.
Nasdaq 100 Index
The Nasdaq 100 reflects the evolution of the largest companies in the major industry groups, including the computer (hardware and software), telecommunications, wholesale and retail, and biotechnology sectors.
This index was created in 1985 and is comprised of the largest market capitalization US and foreign non-financial stocks listed on the Nasdaq.
This index is calculated using the modified weighted capitalization methodology.
S&P 500 Index
The S&P 500 is calculated using a capitalization-weighted arithmetic mean and represents the majority of the market capitalization of the United States.
Other stock indices
IBEX 35 Index
The IBEX 35 is the official index of the continuous market of the Spanish Stock Market and is calculated, published and disseminated in real time by the Sociedad de Bolsas.
It is an index weighted by capitalization, made up of the 35 most liquid companies among those listed on the continuous market of the four Spanish Stock Exchanges.
Despite the scarcity of securities that comprise it, the Ibex 35 represents a large percentage of the total volume contracted in the continuous market, and of the total capitalization of the Spanish Stock Market, which is why it is a good indicator of the trend and evolution From the market.
DAX index
The German Deutscher Aktienindex (DAX) is calculated using an arithmetic average weighted by capitalization, and includes the 30 main securities listed in Frankfurt, selected by capitalization and trading and operating through the electronic system (IBIS).
CAC 40 Index
The CAC 40 is the main index in the French market, consisting of the arithmetic average weighted by capitalization. It includes 40 securities listed on the main segment of the Paris stock market, chosen for their capitalization and liquidity.
Nikkei 225 Index
The Nikkei 225 is Japan's leading index that includes 225 companies. This index is calculated using a simple arithmetic mean, using the Dow system and corrected for extensions since 1991.
Bovespa Index (Ibovespa)
The Ibovespa is the most representative indicator of the price evolution of the Brazilian stock market and shows the behavior of the main shares traded in the Sao Paulo market.
The index, which was created in 1968, is based on a portfolio made up of shares that together represent 80% of the volume traded during the 12 months prior to its definition and that have presented operations in at least 80% of wheels during that period.
Prices and Quotations Index (CPI)
The CPI is the indicator of the development of the Mexican stock market, based on the price variations of a selection of balanced, weighted and representative shares of the set of shares listed on the Mexican Stock Exchange.
The sample used for its calculation is made up of issuers from different sectors of the economy and is reviewed every six months.
The relative weight of each share is explained by its market value. In other words, it is a capitalization value-weighted index.
The base date is October 30, 1978 = 100. 35 share series classified as high and medium marketability are considered, that is, the most traded on the market both by volume and amount.
Stock Market Financial Indices Applied in El Salvador (see annex)
The objective of the El Salvador stock index (IBES) is to Create a parameter that allows us to infer the general behavior of the price of the most stock market shares of the BVES, in addition to obtaining the benefits detailed in item 1.3 referred to the objectives of the indicators, their conceptualization according to the El Salvador Stock Exchange is as follows:
"A price index is an indicator of the variation in the general price level existing in a market or in a certain sector within a market"
Below is the IBES variation graph updated as of 03/10/2006, detailing the shares and issuers that comprise it:
The IBES Elaboration Methodology is attached as an annex, in order to provide a much more detailed framework about its history, meaning, elaboration and analysis.
Practical case
Suppose we read the following headline "The IBEX-35 closes at 9,840.9 points, an increase of 4.9%". Does that mean that all the shares on the Spanish Stock Market have risen 4.9%?
Obviously not. The IBEX-35 is a stock index and, as such, reflects the evolution over time of the prices of the most significant securities listed on the Stock Exchange; in other words, it is representative of the average variation in market prices. For this reason, stock indices are taken as a reference to evaluate the management of a fund or portfolio of securities.
To make a simple approach to the meaning of stock indices, we will use an example. Let us suppose that the price on the stock market of Telefónica's shares in 1999 was the following:
On day 2 the percentage variation with respect to day 1 was:
This evolution can also be reflected by a simple index; If we consider day 1 as the base date, as in the previous calculations, and the price of that day as the base equal to 100, the index would be:
In our example, with a single company, it may be easier to follow the evolution of prices using the first option than to build an index; But if we intend to analyze the evolution, not only of a company but of a group of companies jointly, such as a sector of the economy or all companies listed on the Stock Market, we must resort to the elaboration of indices.
Conclusions
Returning to the information collected and ending with an interpretive analysis about it, it is concluded that the financial stock market indices constitute one of the main decision-making tools regarding stock market investments, since they summarize and define the variations on fund transactions, rise or fall of investment instruments and even the actions of companies issuing securities.
Stock indices by themselves fail to guide investors about which investments to take or leave, or when to do it and when not, but they do provide an objective and reliable record of the movements of the stock exchanges to which they are dedicated, in addition to They group the main instruments and companies involved in the issuance of securities.
The indices are not subjective or subject to "cheating" which gives investors and their advisers an assurance about their use and analysis; However, this does not mean that its interpretation is always correct, since where one person can see an investment opportunity, another will see the opposite. In addition, its simple calculation allows any corroboration at any time.
Indices cannot always be applied, since most of them include only the main issuers of securities (S&P 500, Dow Jones, IBES, IPEX 35, Nasdaq 100 for example), the indices will not always lead to investors and stakeholders about whether the alternative presented is good or not.
On the other hand, some of them include "all" companies (Ibovespa, IPC among others) which can result in high misinterpretations or inadequate, that an index is always on the rise does not mean that the company in the that we think about investing this in effect upwards and vice versa. Let us remember that there will always be companies winning and others losing.
recommendations
Not always following the indices, as it was established previously, the interpretation of the indices is not always the best or the most appropriate, an index is affected and being modified by many other companies in which we are probably not investing; then that this is up or down does not mean that all companies are in the same conditions.
Investors and their advisers should analyze a record of no less than one year of the index they are using, the above in order to achieve an objective and reliable interpretation about the movements that the stock market may have had, that is, that the index has been on the rise during the last month does not mean that it will continue for another month in the same way.
All those involved in making investment decisions should know exactly how the calculation of the indices used is carried out, if a person who does not know how the index is calculated on the stock market that invests is most likely not to be able to interpret it much less analyze it.
An index or set of them are not decisive when making an investment, again the interpretations of the stock indices can lead to wrong investment decisions, the reading and analysis of the indices should be carried out by experts in the stock market. And never take the results obtained as the only analysis tool.
There are hundreds of influencing factors in investments that are not taken into account by indices.
