Trading

Stock Market Indices and the Stock Exchange

The analogy of the world’s stock markets can perhaps be traced to the town market place, where all villagers brought their goods to trade and sell. Over centuries this has led to the present stock exchange. Stock market trading in the United States can be traced back to over 200 years ago, when the colonial government was forced to finance the war by selling bonds and government notes, promising to pay back at a profit at a later date.

At that time Charles calculated the index by a simple method

Around the same time private banks began to raise money by issuing stocks, or shares of the company to raise their own money. Further in 1792, a meeting of twenty four large merchants resulted into a creation of a market known as the New York Stock Exchange (NYSE). The merchants agreed to meet daily on Wall Street to trade stocks and bonds. Soon an average person also realized the value of investing in stocks in comparison to traditional assets like land, house or Gold.In a stock exchange the stock or shares of companies are listed and can be traded i.e. bought or sold. Depending on the economic performance of the company and its financial health as well as economic and investment scenario in the country, where the stock exchange is located, the shares listed have a certain market value.

The merchants agreed to meet daily on Wall Street to trade stocks and bonds

These share prices fluctuate depending on a number of factors including market health, investment climate and company performance.On a stock exchange we have something called the average value of all companies listed. This is the index number. It’s a statistically calculated reference number. It is calculated on a daily basis. This reference number is the stock index of that stock market for that day. This number varies and has a liquidity of its own .

This reference number is the stock index of that stock market for that day

In fact in case it is plotted on a graph it will show a zig zag result. But a central line through it will show whether the stock is stable or going up or going down. There is lot of talk of the market going ‘up’ or going ‘down’. When the market goes up it means that the ‘bulls’ are in action and if going down the ‘bears” hold sway.The index number of the stock exchange is a summary of the market and the financial health of a nation. It encompasses the total value of the stocks that are listed. Presently some of them have become a bench mark for evaluation of a nation’s financial health. They are often referred to when an investment is to be made or loans granted to a nation.Two of the most famous market indices in the world are American. They are Dow Jones Index and SP 500 index. Charles H. Dow takes the credit as the man the Dow Jones Index in 1896. At that time Charles calculated the index by a simple method. He added all the stock prices and then divided the total by number of stocks listed. Presently the system is a little more complex and the calculation takes into account the market weightage of the stock. Also the Index refers to the heavy weight i.e. stocks that have the greater value and market capitalization.Other market indices are also well known.They include the FTSE of Britain, CAC 40 of the French republic, DAX for Germany and Nikkei 225 for Japan. Among the emerging markets NSE Nifty is important from India.An index is an imaginary number that represents portfolio of securities that are listed on the exchange. This number is like a reference bench mark that is used by investors and CA’s and money managers to assess the state of health of the financial market of a country. The creation of this benchmark has also encouraged a large number of investing population to opt for the first time in investing in stocks, despite having very little financial knowledge. There are now indexes for technology stocks, pharmaceuticals etc also. In 1985, the NASDAQ introduced its own index to compete with the SP. The Nasdaq 100 contained more companies from the technology sector. The NASDAQ itself has been growing in importance as both the computer and the internet have taken technology inside peoples homes.Presently the names of indexes such as the Dow Jones Industrial Average(DJIA), SP 500 and NASDAQ composite have become part of our everyday vocabulary. For example, two of the best known indexes for the stock market in the United States are the Dow Jones Industrial Average and the SP 500 index. These are Global standards.Indexes help track the performance of the market. So, if you hear that the SP 500 was up 5%, you know that the stock market (as represented by the SP 500) has gone up around 5% in value.The impact of indexes on investing is huge. This is because these indices from Tokyo to New York have brought about greater transparency all around. Other prominent indexes include the DJ Wilshire 5000 and the MSCI EAFE (foreign stocks in Europe, Australasia, Far East). Each index has its own methodology for calculation and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value.Presently Standard Poor’s 500 is one of the world’s best known indexes. This index is a bench mark for a lot of experts around the globe. The challenge for investors presently is not to get reliable market information, but how to utilize the information available.