What are Equity Indices and How Do They Work? 

Commonly referred to as indices, these indicators do exactly what their name suggests: they reflect how the market is performing. Equity indices help us understand how a group of different stocks are performing collectively, rather than just focusing on one company. They offer a broader view of the market’s overall status, and you’ve likely encountered them in news reports.

You might have also heard of the renowned Dow Jones. In the intricate world of financial indices, the Dow Jones Industrial Average, often referred to simply as the Dow, holds a significant position. It’s not merely a fluctuating number displayed on screens; it serves as a barometer of the American economy. Comprised of 30 of the largest and most influential publicly traded companies in the United States, the Dow Jones represents a diverse spectrum of industries, from technology pioneers to manufacturing leaders and financial giants.

Equity indices span various sectors, including technology, healthcare, finance, or a blend of sectors, mirroring the performance of major companies within those domains.

1. New York Stock Exchange (NYSE) and NASDAQ: These two major stock exchanges in the United States are home to some of the most influential indices, including the Dow Jones Industrial Average (Dow Jones) and the NASDAQ Composite.

2. Wall Street – The Dow Jones: Often synonymous with Wall Street, the Dow Jones Industrial Average is a cornerstone of American finance. Tracking 30 powerhouse companies like Apple, Intel, Exxon Mobil, and Goldman Sachs traded on the New York Stock Exchange, the Dow Jones serves as a vital gauge of the nation’s economic vitality.

3. S&P 500: Considered a key indicator of the U.S. stock market, the S&P 500 tracks the performance of 500 large companies listed on both the NYSE and NASDAQ. It provides valuable insights into the overall health of the U.S. economy.

4. FTSE 100 (UK100): In the UK, the FTSE 100 reflects the performance of the largest companies listed on the London Stock Exchange. With a focus on sectors such as mining, energy, and finance, it offers a snapshot of the UK’s financial landscape.

5. GER40 (DAX): Germany’s economic health is closely monitored through the DAX, which tracks the top 40 companies listed on the Frankfurt Stock Exchange. Industries covered include finance, automotive, healthcare, and chemicals, with major players like Allianz, BMW, Bayer, and Siemens leading the index.

6. Nikkei 225(JP225): Acting as a pulse check for Japan’s economy, the Nikkei 225 index monitors 225 companies listed on the Tokyo Stock Exchange. It serves as a significant indicator of Japan’s financial well-being.

7. AUD200: In Australia, the AUD200 reflects the performance of the top 200 companies listed on the Australian Securities Exchange (ASX). It provides insight into the country’s economic strength across various sectors.

Indices are calculated in different ways, depending on the type of index and the goals of the index provider.

• Price-weighted: This method gives more importance to stocks with higher prices. The Dow Jones Industrial Average uses this method.
• Market capitalization-weighted: This method gives more importance to stocks with larger market values. The S&P 500 is an example of this type of index.
• Equal-weighted: This method treats all stocks in the index equally. The S&P 500 Equal Weight Index is an example of this approach.

How are indices put together?

Indices are created by committees that set rules for which companies can be in the index. These committees meet regularly to check the rules and decide if they should add or remove companies.

Global indices: These indices monitor the performance of stocks from all around the world. The MSCI World Index is an example of a global index.

Regional indices: These indices monitor the performance of stocks from a specific region. The S&P Europe 350 Index is a regional index.

National indices: These indices monitor the performance of stocks from a particular country. The FTSE 100 is an example of a national index.

Exchange-based indices: These indices monitor the performance of stocks listed on a particular exchange. The NASDAQ 100 is an exchange-based index.

Industry indices: These indices monitor the performance of stocks from a particular industry. For instance, the S&P 500 Information Technology Index is an industry index.

Currency indices: These indices monitor the performance of a specific currency against a basket of other currencies. The US Dollar Index is a currency index.

Sentiment indices: These indices gauge the level of investor sentiment towards a specific market or asset class. The VIX is an example of a sentiment index.

Economic news: Economic indicators like GDP growth and interest rates can impact stock indices.

Company earnings: The release of earnings reports by companies can also affect stock indices.

Political events: Events such as elections and conflicts can influence equity indices.

Commodity prices: Changes in commodity prices, especially for companies linked to commodities, can impact stock indices.

Investor sentiment: The overall mood and confidence of investors can also influence the price of equity indices.

Investing in equity indices through Contracts for Difference (CFDs) provides investors with convenient access to global markets with minimal capital outlay. FXGT.com offers a diverse range of the most popular global indices, allowing traders to capitalize on opportunities across various regions and sectors. With FGXT.com’s platform, investors can efficiently diversify their portfolios and potentially achieve their investment goals through trading equity indices.