2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16
Probably, everyone at least once in his life heard about world indices. What are they? What are they used for? How are world indices calculated? These and other questions will be answered within the framework of this article.
General information
To begin with, let's look at what world indices are. This is the name of the indicators of changes in the price of a certain group of securities. On what basis do they unite? Drawing an analogy, we can say about a portfolio of shares that are united according to one attribute (owner, industry, and so on). When a certain index is compiled (or studied), the most important thing is what securities it was formed from. Due to this, according to the set of stocks and bonds that were included in it, it is possible to study the situation on the market. Information can relate to a specific area or to the entire economy. The dynamics of world indices allows one to judge development in general, since it takes into account a whole set of enterprises, which, as a rule, are very weakly connected (or there is no relationship between them).
What types of these indicators exist? Indices can be classified by calculation method, family and author. Each type will be consideredseparately.
Oldest indicators
Initially, let's touch on days long past. The first widely used index was created by Charles Dow back in 1884. It was calculated on the basis of quotations of 11 largest transport companies that were listed on the US stock exchange. In 1896, it was redesigned and began to reflect the state of affairs of the already largest industrial enterprises in the United States of America.
Quite famous is the S&P 500 index, which focuses on the top 500 companies in the US overall. It was created in 1923, but the modern version appeared in 1957. These two, due to the high accuracy of the processed data, are recognized as the main world indexes, although they are primarily aimed at the United States. Why is that? The fact is that the largest number of the largest companies in percentage terms is located in the United States. And the huge influence of this state on the entire planet is pushing many to recognize the Dow and the S&P 500 as the main world stock indices that show emerging trends.
Why are they needed?
If we consider the general case, then world indices are indicators by which investors can characterize for themselves the speed and general direction of movement of companies in a particular industry or the entire economy. Based on this data, decisions are made about where to invest money. Changes can also inform about the impact of certain events.
Let's take a looksmall example. Let's say the price of oil goes up. What will happen on the market in this case? The value of companies that extract oil will also begin to grow. This is, of course, a very simple and primitive example, but it gives an understanding of what kind of things indexes allow to judge. Earlier it was said about types of indexes. Let's go back to them again.
Calculation methods
One of the oldest provides for the search for the arithmetic mean. If we talk about world stock indices that used this approach, we should mention the Dow Jones. It was calculated based on weighted average share prices. But over time, the imperfections of this method became obvious. What made itself felt most significantly was that the companies issued different numbers of shares. As a result, the real state of affairs was significantly distorted. True, there are pluses here, because such indices are distinguished by the simplicity of calculation and the speed of reaction to fluctuations in the price of stocks and bonds. As a result, when a crisis occurs, they will learn about it very quickly.
An alternative to this approach is to use a weighted arithmetic mean. An example is the Value Line Composite Aithmetic Index. In this case, the price of each share is multiplied by a certain coefficient corresponding to its share in the total value of the index.
The last approach that stands out is the search for the geometric mean. An example is FT 30.
Families and manufacturersindices
This concept is introduced for indicators that are calculated by one organization. As an example, we can recall the rating agency Standard &Poor's, which evaluates not only the 500 largest companies, but even countries. Individual exchanges also have their own families (NASDAQ, MICEX, RTS, DAX 100 Sector Indexes and many others). With regard to manufacturers, we can say that they can again be agency when the relevant organization is compiling them. They are also formed by individual exchanges.
Conclusion
World indices are an important investment tool for a large number of people and organizations. If we talk about the situation of the Russian Federation, then two characteristic features should be distinguished here:
- Russia is not yet a country that hosts key global players.
- Due to the policy of sanctions by the European Union and the United States, there has been a trend according to which rating agencies and stock exchanges are beginning to create new indicators that do not include the state of affairs in the Russian Federation. Officially, this is aimed at protecting investors from the influence of the country, which is in partial international isolation, and investments in risky assets.
World indices can be useful even for those people who are just planning to build their investment portfolio in order to have more opportunities for a free life in the future.
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