Definition of Stock Index
A stock exchange market is a marketplace for securities featured by the centralization of supply and demand. This organization of buyers and sellers defines the activity of a stock market. Representing the stocks and share listings are indexes, which provide investors with a mechanism to gauge a number of key decisions.
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Indexes Defined
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A stock market index is defined by the New York Stock Exchange as "any comprehensive measure of market trends, intended for investors who are concerned with general stock market price movements." An index is a weighted average of the market capitalizations of the stocks they represent, which moves up and down depending on the individual share prices of the component parts. There are also different indexes created to reflect sectors, where components are drawn from a single category of the market.
History of Indexes
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The first US stock index was created in 1896 when the Wall Street Journal published the Dow Jones Industrial Average. It had an initial value of 40.74 and represented 12 stocks. The Financial Times in London published the first FTSE listing in 1962 and the Japanese Nikkei index was first published in 1950 by the Nikkei newspaper.
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US Indexes
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The most widely known index is the Dow Jones Industrial Average or "the Dow" and quotes the NYSE top 30 companies. It represents a broad range of US companies, many of which like Ford, GE and Coca-Cola have been constituent stocks for many decades. They are known as bellwether stocks, i.e. stocks which reflect the general economy, and as such the Dow is regarded as a reflection of economic sentiment. The NASDAQ composite index reflects the technology-heavy listings of its constituents, like Apple, Microsoft and Google. Standard & Poors 500 represents the leading NYSE large and mid-sized stocks. The Willshire 5000 aims to represent at least 98% of all NYSE stocks.
Leading International Indexes
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The leading European exchange is London and the FTSE 100 reflects the top 100 listed UK shares. Paris lists the top 40 in its CAC40 and Germany's DAX index includes listings for Daimler, Commerzbank and Bayer. In Asia the leading indexes are in Tokyo and Hong Kong, but in recent years, the rise of Shanghai and Bombay stock exchanges have meant their indexes are more closely followed by investors.
Component Indexes
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Component indexes reflect particular sectors and are designed to track the performance of various industries. Many of these indexes track shares in commodities, such as gold and oil, and have constituent stocks which are weighted in the same way as a normal index. These indexes are more volatile in that they more directly correlate with the prices of the commodities they represent.
Dow Jones levels
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It took the Dow Jones 76 years to reach the 1000 level, 15 years to breach 2000 in 1987, 6.5 years to double to 4000 in 1995, just 2 years to get to 8000 and in 2007 it reached its all time high overcoming the 14000 level to close at 14066 on October 1, 2007. On March 2, 2009, in the wake of the financial crisis, the Dow closed at a low point of 6626. Its recovery has been swift, with the Dow surpassing 11000 in April 2010.
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References
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