Stock Index Development: Stock exchange indices reflect the general evolution of prices of listed shares, unless they are sector indices (evolution of a sector, e.g. electricity, automotive, construction, etc.) or economic zones indices that are wider than one stock exchange (e.g. Eurostoxx 50 for the euro area or Eurotop 100 for all European exchanges). The following example shows a simple approximation of the meaning of the indicators:
The shares have the following strike prices on the market:
Day 1: EUR 16.00 per share
Day 2: 16.40 euro/share
Day 3: 17.00 euro/share
The change of course between day 1 and day 2 is: ((16,40-16,00)/16,00) × 100 = + 2,5%.
The exchange rate change between day 1 and 3 is variable:
((17,00-16,00)/16,00) × 100 = +6,25%
Another way to show this evolution would be to compose an index with this data (we assume 100 as the starting price of the index on 1 day):
Day 1: 100
Day 2: 102.5
Day 3: 106.25
This is a very intuitive way to see the evolution of this activity in this short period. If many actions are analysed, it becomes necessary to construct an index. When developing each stock index, it is necessary to take several previous steps:
- Select the values that make up the index. There are many criteria that are sometimes applied individually and sometimes collectively, including the effective trading volume, market capitalisation (share price by number of shares), trading frequency and liquidity of the securities, without focusing on a small number of investors or financial intermediaries. These criteria are not identical in all indicators, either qualitatively or quantitatively.
- The weighting system for each security (or group of securities) included in the index.
- Mathematical formulation of the index.
Once an index has been prepared, it will be fed with data on the share prices that make up the index so that its value can be calculated daily.
Stock Index – Types Of Indices
The development of stock indices may be based on them:
(a) Prices or yields
(b) Long or short
(c) Weighted or not
Prices or profits
Only the prices of the assets will be taken into account in the preparation of the price index, so that the price drop caused by the delivery of dividends will be included in the index. In contrast, the efficiency index takes into account, in addition to price changes, profits from dividends, stock deliveries, etc. For Ibex 35, DJ Eurostoxx, 50 are price indices.
Long or short
This characteristic refers to the timeliness or absence of an indicator. A short index is created with an end date, while a long index without a future end date.
Weighted or not
The weighted stock index takes into account the market capitalization at the time of calculation, so Telefónica or Santander will have a higher weight on Ibex 35 than other companies with lower capitalization. An unweighted index does not take into account any kind of weighting, but only adds the share price and divides it by the number of shares that make up the index.
Stock exchange indices in Spain
In Spain, the stock exchange’s most important reference index is IBEX 35, which consists of 35 companies considered to be the most representative of the stock exchange.
The characteristics of IBEX 35:
- A representative index of the Spanish stock market (continuous market – SIBE), which comprises the 35 most liquid companies (highest trading volume).
- Other factors are also taken into account, such as: market capitalisation, trading frequency, degree of concentration of trade by one operator, statistical references (volatility and beta coefficient).
- Since 2000, the criterion determining the weight of the securities has been the individual market capitalisation of each security adjusted for free float, i.e. capital that can be freely bought on the stock exchange.
- The base date and amount are 29-12-89 and 3 000.
- It is owned by the Stock Exchange Society, which designs, calculates and distributes it.
- It is calculated in real time, each time a new operation is exceeded at a different price than the previous one.
- It is a performance price index (not supply and demand prices).
- It is very representative of the Spanish stock market (85-90% of the total market capitalisation and trading volume in the Spanish stock market). It has a high degree of concentration, since only 6 securities have a weight above 60% in IBEX 35 (Telefónica, BBVA, BSCH Endesa, Repsol, Iberdrola).
Another important new benchmark index is the index of shares listed on the technology market: Nuevo Mercado (Technology) Index.
International stock exchange indices
Within the international market we were able to distinguish other representative stock indices of different countries:
The United States:
Dow Jones Industrial Average (DJIA). This is the best known index of the evolution of the New York Stock Exchange, consisting of 30 industrial shares, which has no fixed weighting system, except for the share prices that make it up.
Nasdaq (NY). Made up of 100 technological stocks. Therefore, it is subject to greater fluctuations than DJIA.
Standard & Poor’s 500 (SP500). It also consists of securities from the New York Stock Exchange, but with a large sample of shares, and widely used as a basis for futures contracts.
Dax 30. This is an index of the Frankfurt Stock Exchange. –
Cac 40. From the Paris Stock Exchange.
FT SE 100. From the London Stock Exchange.
MIB 30. From the Milan Stock Exchange.
DJ EUROSTOXX 50 and FT Eurotop 300. Indices which include the most relevant securities from different European countries.
The rest of the world:
Nikkei 225. From the Tokyo Stock Exchange.
Bovespa. From the Brazilian Stock Exchange.
Merval. From the Buenos Aires Stock Exchange.