What are stock indices?

You may have already heard of stock indices such as the FTSE 100, the Dow Jones or the Nikkei 225, and regional indices like the DFM General Index. Numbers are often quoted on the news, usually alongside a value saying how much they've moved up or down.

But what are they and what do they represent?

A stock index measures the value of a specific section of the stock market. This certain section of the stock market can be:

• An exchange (like the Tokyo Stock Exchange or Nasdaq)
• A region (such as Europe or Asia)
• Or a sector (energy, electronics, property, etc.)

The FTSE 100 for example, tracks the largest 100 companies traded on the London Stock Exchange.

If, on average, the stock price of these companies goes up, then the FTSE 100 will rise with them. And if the stock prices fall, it will drop.

Why are stock indices important?

Stock indices give traders and investors an indication of how an exchange, region or sector is performing.

The ASX 200 for example, tracks the performance of 200 of the largest companies in Australia. If the ASX 200 starts to rise, then on average these companies are performing well. A rising ASX 200 tells investors that, generally, the state of the Australian stock market is improving.

If the Australian stock market is on the up, then more often than not, the entire Aussie economy tends to be doing well. So, movements in the price of major stock indices can often give traders an indication as to the health of an entire country.

Similarly, in the UAE, the DFM General Index tracks listed companies on the Dubai Financial Market and is often viewed as a gauge of local economic sentiment.

That's important information when planning your next trade.

What are the major stock indices?

• Every major market has at least one key index.

The US, however, has several major indices representing different segments: Wall Street (Dow Jones), US 500 (S&P 500) and US Tech 100 (Nasdaq 100). Let's take a closer look at the three main US indices:

Dow Jones Industrial Average (DJIA) (Wall Street)

One of the oldest and most quoted indices, the Dow Jones Industrial Average represents 30 of the most influential companies in the US. It was first calculated in 1896 and historically was made up of firms involved in heavy industry. Nowadays this association has been all but lost.

S&P 500 (US 500)

More diverse than the DJIA, the S&P 500 is based on the value of 500 of the largest US stocks listed on either the New York Stock Exchange (NYSE) or Nasdaq. It was first used in its current form in the 1950s and today represents around 70% of the total value of the US stock market.

Nasdaq-100 (US Tech 100)

Established in 1985, the Nasdaq-100 is based on 100 of the largest non-financial companies listed on the Nasdaq exchange in New York City. It represents firms across a number of sectors, but in particular computing, telecommunications and biotechnology.

Now that you understand what stock indices are and why they matter, you can start following their movements and seeing how different markets perform. Indices offer a way to gauge entire economies at a glance, and that insight can be valuable when you're planning your trading strategy.

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