A market index is a statistical measurement calculated by the regrouping of the values of the titles of several companies. The market index is generally used to measure the performance of a purse or a market.
The performance of a purse is usually measured by several indices:
- a principal index which measures the total performance of the purse; this index is calculated starting from the majority of companies registered with this purse or at the very least the majority of the large companies registered with the purse;
- of the sectoral indices which measure the performance of a subset of companies having common characteristics; these indices are calculated starting from the companies included in the subset concerned (for example, companies of a branch of industry like telecommunications or companies of similar size like the small companies).
When it is said that a purse is in rise or fall, one generally refers to his principal index, for example CAC 40 for the Paris Bourse.
Certain indices reflect the economic activity of an area and include/understand companies dimensioned on various purses. These indices are in general published by independent companies. For example, the Dow Jones Industrial Average and S&P 500 contain companies dimensioned on three New York Stock Exchange, the purse NASDAQ, the New York Stock Exchange and the American Stock Exchange.
It is possible to invest in tools which retort the performance of an market index, making it possible an average investor to vary his investment at the same rate/rhythm as the purse (raises some or in fall) without having to buy titles of several companies. Two products of this type are available in the majority of the countries:
- the investment companies with variable capital (SICAV) or the Investment funds (CPF) indexed;
- the negociated on the market funds indiciels which are SICAV dimensioned uninterrupted with the purse; as these funds take overheads less low than the SICAV and the CPF (approximately 0.5% compared to 2 to 3% for the SICAV and the CPF), their popularity grows very quickly.
Calculation of an index
The majority of the great market indexes are calculated by adding the market caps with the companies the component then by dividing the sum obtained by a constant value so that the value of the index is a relatively small number. For example, 100 or 1000 at the time of the creation of the index.
More recently, the calculation of many market indexes takes nothing any more into account but the floating of the companies the component, i.e. the part of the company indeed likely to be exchanged out of purse, which excludes the blocks of more than one certain percentage of actions (usually 20%) held by an organization or a group of dependant organizations. It is said that organizations are dependant when one of them can influence the decisions of another, for example a holding can influence the decisions of its subsidiary companies.
There exists obviously of other means of calculating an market index while being based on other parameters that market cap: the value of an action, volumes of transaction, etc For example, the Dow Jones Industrial Average (DJIA) is calculated like the average of the value of the actions of the companies included in the index.
- List of market indexes
- List of companies by market index
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