A look at the stock market index shows how well a country is doing economically. In addition to the stock market index, there are also special indices that track the economic development of individual sectors, such as industry, banking or the automotive industry.
Example of an index
The NASDAQ Biotechnology Index is an industry-weighted index that only tracks the stock market values of companies that are active in the field of biotechnological research. The stock market index is an important average, which includes a certain number of shares or share prices. The larger the listed company, the greater its index weighting. The French index CAC consists of the forty most successful companies in France. The AEX stock market index measures the success of the 25 best Dutch companies. This index started in 1983 with a base value of 45 points, today it is at 450 points (counters).
What do the points mean for the indices?
This increase in the AEX means that the share value of the Dutch companies listed in this stock market index has increased tenfold in the past three decades.
How does the index result?
The index value is determined based on the average share price of the entire group. Market and capitalization weighted indices calculate the index weight based on their total market value as you can see on Crypto news. The larger a company is, the more influence it has on the entire index within the group.
Price-weighted or market-weighted index?
Most indices are market-weighted , such as the FTSE100, which reflects the UK's economic situation. Price-weighted indices define a company's index weight by the value of its shares. If a company has a high share price, it has a greater impact on the index size than a company with a lower share price. The Dow Jones is an example of a price-weighted index.
Alignment of indices
Most indices tend to be regional, which is a good indicator of the health of the regional economy. They can also give you an informative impression of market regulations and prevailing market trends.
Not necessarily rational: influence of investor psychology
However, it should be borne in mind that market activity is not always rational and often does not follow the prevailing economic situation. Market determination depends primarily on the behavior of investors and their willingness to take risks. If the market trend moves towards risky assets, the index may rise, even though the economy is weakening in parallel. In this context, it is important to mention that market volatility increases in bad stock market years. The financial market moves more in these years than in good stock market years, in which the share prices remain stable. The financial parameters can be subject to strong price fluctuations, which also affect market liquidity, which is also considered a risk indicator.