What Is Stock Market Indices And Which Indices To Favor?

A stock market index is an indicator that tracks the performance of a set of listed transferable securities, and in particular stocks and bonds. They allow to know the general tendency of the market or of a part of the market. There are tens of thousands of clues around the world.

The general public is familiar with stock indices such as the CAC 40 and the Dow Jones. However, these are not the most important indices, and the most useful for an investor who wants to advance his wealth.

Knowing the stock indexes is very important, because the vast majority of managers compare themselves to a stock index. This is an important indicator for having a critical look at their management.

Likewise, a private investor investing directly in equities will be able to compare the performance of his investments, and check whether he has a performance above or below that of the market.

The most informed investor will certainly be particularly interested in indices, because he will use ETFs , which are precisely intended to follow indices at a very low cost.

The Different Types Of Index

A stock market index is mainly defined by:

  • Its geographic area.
  • The sector (s) it covers.
  • The size of the companies it tracks.
  • How to calculate the weight of the different actions.
  • The integration of dividends, which can be net or gross of withholding taxes. 

The Most Popular Stock Market Indices

The most famous indices of the French are certainly:

  • The CAC 40
  • The Dow Jones
  • The DAX
  • The Nikkei

However, there are very many. I am sharing with you a somewhat larger list.

  • CAC 40
  • S&P 500
  • DAX
  • MIB
  • FTSE 100
  • IBEX
  • NIKKEI
  • Dow Jones Industrial Average
  • SSE Index
  • NASDAQ 100
  • CAC Small Caps
  • MSCI All World IMI
  • Dow Jones Sustainability Index

Read Also: Daily Stock News

Stock Market Advice: Which Indices To Favor?

There are a myriad of stock market indices. So how do you navigate it? Here is a selection of indices that we recommend for the year 2020.

  • Dow Jones

It is one of the fundamental stock indexes in the United States. The Dow Jones is made up of the 30 most important companies in the economy of this country. It is found there and all industries, except utilities and transport. Both are currently listed on the New York Stock Exchange and the Nasdaq.

The Dow Jones is the oldest index in the world. It enjoys a very good reputation internationally. In addition, it has high liquidity and an attractive level of volatility. It is therefore a good clue to choose.

  • Nasdaq 100

It is a stock index which is also American. But it dates from much later, in 1985. It is the second electronic exchange in the United States, with a volume of transactions much greater than that of any other exchange in the world.

The Nasdaq is headquartered in New York, in Times Square. It is made up of more than 100 companies and is subject to an annual review. The major stocks in which tech, telecommunications, retail, wholesale and biotech companies are found trade on this index.

Choosing the Nasdaq therefore means diversifying your investment portfolio , by investing in a hundred large-capitalization companies in the United States and the rest of the world.

  • DAX 30

It trades on the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse). The DAX 30 is a stock market index that serves as a benchmark for the performance of the 30 companies with the largest market capitalization in this country.

The DAX is considered to be the main index on the German market. Investing in the DAX is thus investing in the German economy, which is one of the most solid economies in Europe.

  • FTSE 100

It started to calculate with a base level of 1000 points. The FTSE now has around 100 companies with the largest market capitalization in the UK. Thus, it represents the total market value of the country. The FTSE bears the name of the English initials “Financial Times Stock Exchange”, and is an index on the London Stock Exchange. Again, an investment in the FTSE is a very easy and quick way to diversify your portfolio.

Conclusion

When investing in stocks, or even in other asset classes, it is very important to know the stock market indices. This knowledge is as useful to the one who will trade by observing live prices, as to the long-term investor, who will be more interested in the composition (which securities follow the index? What is the sectoral composition? etc.) rather than courses.

Knowledge of stock market indices is a key element in selecting an ETF and building an ETF portfolio . Index issuers provide many elements in their factsheet to help us better understand them.