What is an Equity Index ?
Also known as a Stock Index.
Indices are used for measuring how the stock market is doing as a whole.
A typical index is made up from a weighted sum of a selection or basket of representative stocks.
The selection may be designed to represent the whole market such as the S&P500 or the FTSE100 or a very special part of the market.
Component Stocks - index containing a specific subset of companies (eg bluetip, sectors)
Number of Stocks - DJIA has only 30 stocks, Russell Global Index has 10,000 (from 63 countries)
1) Market Cap Weighted - more weight is given to larger companies
2) Price Weighted - only affected by changes in price (not by the size of the company)
3) Equally Weighted - equal weighting to large and small. ENtirely unweighted in relation to market and price
Equity Indices - there are 2 type:
Market Capitalisation or Averages
Share indices are usually based on market capitalisation.
If an index has for example the top 50 companies then it is the largest companies based on market capitalisation.
Some indexes are described as weighted. This means that a 1% change in the share price of one company might have more (or less) impact than a 1% change in the change in the share price of another company.
Since the share price is always changing, the top shares are not always the same. The list of companies in an index of often reviewed every quarter.
An average index simply adds up all the share prices and divides by the number of companies
An example of an averaged index is the Down Jones Industrial Average.
Modern indices are based on taking the number of shares and multiplying by the price.
In Japan, the main index is the Nikkei Dow 225. This is based on averages (not capitalisation)
The TOPIX (Tokyo Stock Exchange Price Index) is based on capitalisation
FTSE - based on capitalisation
CAC 40 - based on capitalisation
DAX - calculates continuously and also include dividends and therefore calculates total return. This makes it especially attractive for some "swap" transactions
There are also world indices - Morgan Stanley World Index
In Europe we have Eurotop 100
London - 8:00 - 16:00
New York - 9:30 - 16:00
Hong Kong - 10:00 - 12:30, 14:30 - 16:00
Tokyo - 9:00 - 11:00, 12:30 - 15:00
The worlds 3 largest exchanges are:
London Stock Exchange, NYSE Euronext and Nasdaq OMX
Market Cap - large, mid, small (mega, micro, nano)
Industry / Sector - GICS classifications
Behaviour / Performance
1) Growth Stocks - earnings expected to grow, above average, strong ROE, peg ratio
2) Value Stocks -
3) Income Stocks -
4) Cyclical -
5) Non Cyclical -
6) Seasonal -
7) Blue Chip -
8) Penny -
Broad Base Indices
A broad-base index represents the performance of a whole stock market.
The most regularly quoted market indexes are broad-base indexes comprised of the stocks of large companies listed on a nation's largest stock exchanges
Price Weighted Indices
In a Price-weighted index such as the Dow Jones Industrial Average, the price of each component stock is the only consideration when determining the value of the index
Therefore a price movement of even a single security will heavily influence the value of the index - ignoring the relative size of the company.
Share Weighted Indices
Also known as market weighted or capitalsation weighted.
In a market wighted index such as the Hang Seng the size of the company is taken into consideration.
A relatively small shift in the price of a large company will heavily influence the value of the index.
In a market-share weighted index, price is weighted relative to the number of shares, rather than their total value.
Typically these indices all have a full weighting (i.e. all outstanding shares are included) although recently, many of them have changed to a float-adjusted weighting which helps indexing.
While capitalization weighting is the standard in equity index construction, different weighting schemes exist
The movement in an index are frequently referred to in terms of points
Investors are always trying to "beat the index" which is most relevant to their portfolio of shares.
Some investors try to match the performance of an index by buying the stocks in that index in the same propertions as they are represented in the index.
When a new company launches many institutions are bound to buy the shares just to maintain their indexed portfolios.
What are the common JP Morgan Indexes ?
JP Morgan EMBI+
This an index of emerging market debt instruments, including external-currency denominated brady bonds
The main components of this index are the 3 major Latin American countries
Argentia, Brazil and Mexico
Bulagria, Morocco, Nigeria, The Phillippense, Poland, Russia and South Africa are also represented
Total Return Indexes
Many stock indexes only take into account the prices of the underlying stocks, not the dividends.