Probably, everyone at least once in his life heard about world indices. What are they? What are they used for? How are world indices considered? These and other questions will be answered in the framework of this article.
general information
To begin, let's look at what the world indices are. This is the name of the price change indicators of a certain group of securities. On what grounds are they combined? Drawing an analogy, we can say about the stock portfolio that are combined on one basis (owner, industry, and so on). When a certain index is compiled (or it is studied), the most important thing is which securities it was formed from. Due to this, the set of shares and bonds that were listed in it, you can conduct a study of the situation on the market. Information can relate to a specific area, as well as to the entire economy. The dynamics of world indices allows us to judge the development in general, since it takes into account a whole set of enterprises, which, as a rule, are very weakly connected (or there are no relations between them).
What types of these indicators exist? Indexes can be classified by calculation method, family and author. Each type will be considered separately.
Oldest indicators
Initially, let's touch on bygone days. The first widespread index was created by Charles Dow back in 1884. It was calculated based on quotes from 11 of the 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 simply largest industrial enterprises of the United States of America.
Quite famous is the S&P 500 index, which pays attention to the five hundred largest companies in the United States in general. It was created in 1923, but a modern version appeared in 1957. These two, due to the high accuracy of the processed data, are recognized as the main world indices, although they are primarily aimed at the USA. 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 S&P 500 as the main global stock indices that show emerging trends.
What are they needed for?
If we consider the general case, then global indices are indicators due to 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 these data, decisions are made on where to invest. Changes may also inform you about the impact of certain events.
Let's look at a small example. Suppose that there is an increase in oil prices. What will happen on the exchange in this case? The value of companies that produce oil will begin to grow. This, of course, is a very simple and primitive example, but it gives an understanding of what things indexes allow to judge. It was previously said about the types of indexes. Let's get back to them again.
Calculation Methods
One of the oldest involves the search for the arithmetic mean. If we talk about global stock indices that have used this approach, we should mention the Dow Jones. It was calculated at the weighted average share prices . But over time, the imperfections of this method became apparent. Most significantly, the fact that companies issued a different number of shares made it clear to themselves. As a result, the real state of affairs was significantly distorted. True, there are pluses, because such indices are distinguished by the simplicity of calculation and the speed of reaction to fluctuations in the price of shares and bonds. As a result, when a crisis sets in, they will learn about it very quickly.
An alternative to this approach is the use of arithmetic mean weighted values. 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 is highlighted is a search for the geometric mean value. An example is FT 30.
Families and index producers
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 estimates not only the 500 largest companies, but even the country. Separate exchanges also have their own families (NASDAQ, MICEX, RTS, DAX 100 Sector Indexes, and many others). Regarding manufacturers, we can say that they can again be agency when the organization concerned is involved in 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 in the Russian Federation, then there are two characteristic features:
- The Russian Federation is not yet a country in which key global players are located.
- 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 exchanges begin to create new indicators that do not include the situation in the Russian Federation. Officially, this is aimed at protecting investors from the influence of the country, which is partially internationally isolated, and investing in risky assets.
World indices can be useful even to those people who are just planning to collect their investment portfolio in order to have more opportunities for free life in the future.