What Are The Stock Indices And What Are They For?

Did you know that the first stock index goes back to the end of the 19th century? Or how are the companies that are part of them chosen?

Terms such as IBEX 35, Nasdaq or Dow Jones are very common in our day to day. Its evolution, ascending or descending, marks the situation of the economy and the business fabric of a country or a specific industrial sector. It is about stock indices, a way of grouping the actions of different companies into a single global value.

But do we really know how a stock index works, what is its origin or what is it for? The official definition is that each of these indexes works as a mathematical weighting of different stock values ​​that allows measuring their joint strength in comparison with titles grouped in other similar indexes.

When choosing each value, what is usually taken into account is stock market capitalization, although other criteria are sometimes added, such as the dividends that each organization offers. Based on this main scale, companies that are part of the index are selected, a list that is not closed as organizations are added and eliminated according to their economic performance.

Likewise, the companies that are part of each index must comply with certain solvency requirements, financial transparency and good governance policies.

Therefore, the main function of the stock indices is to serve as a reference for the different market players, who can know the real state of an economy, industry or business sector in a global way, without having to analyze each and every one of them. of the companies that operate in these segments. Something like a thermometer of the finances of these sectors or countries. Likewise, investment indexes have been created on these indices that help diversify the portfolio of shares without complexity.

The first stock market index in history

We have to go back to the end of the 19th century to find the first stock market index in history: the Dow Jones Industrial Average. Created by tycoon Charles Henry Dow and the Wall Street Journal, this index was born with just 12 registered companies, among them the main American companies of the time, such as General Electric or the American Tobacco Company.

Today, this index continues to be the reference scale by which the financial and economic health of the United States is measured, although at present there are already more than thirty values ​​measured within this index.

Types of stock index

As we said, the stock indices give us a true image of a group of companies. The rule that is followed when determining which companies can be included and which ones cannot be included in the sum is what will determine the type of index we are talking about.

Thus, there are general indexes, which represent an average of the variation of all the securities listed on a given stock market (for example, the IBEX 35 is a grouping of the main shares in Spain), and sectoral indices, which are limited to a single business segment, such as industry, technology or "green" companies.

How a stock index is measured

Although the stock indices are based on the value of the shares of the companies that make them up, their status is not shown in euros as one might think but in points. Thus, depending on the fluctuation of the values ​​at each moment, they increase or decrease the points, following mathematical rules that differ between each index but that tend to the weighting and average performance of all the affected titles.

It should be considered that, just as the shares of a company reach the stock market with an exit price (established in the corresponding IPO), in the case of indexes they also have an initial base on which these increases are recorded or descents. Therefore, an index "worth" 15,000 points does not imply that its performance is better than another that presents a balance of 5,000 points, but we must analyze what has been the evolution that each of them has suffered since birth.

The main stock indices of the world

Beyond the aforementioned Dow Jones, in the United States there is another large stock index known as Nasdaq 100, which includes only large technology-based companies, such as Microsoft or Google. The rise of the ICT industry in recent decades has made the Nasdaq one of the world's fastest growing reference mirrors.

Back in the Old Continent, the main stock indices are not thematic but segmented by geography, more specifically, by each of the countries. Thus, we find the German DAX 30 (with companies such as BMW or Siemens), the British FTSE 100 (with a large share of that nation's banks), the French CAC40 or the Spanish IBEX 35, which offers an average of the quote of the 35 largest companies in our country, with an initial base of 6,000 points (currently oscillating in the environment of 9,000 points).

In the rest of the world, the Nikkei 225, managed by the Japanese Stock Exchange, in addition to the Argentine Merval or the Brazilian Bovespa, stand out above others.