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Stock indexes over the years are the usual indicators of the economy. We constantly hear about them in the news reports and see on the pages of newspapers. Let us try to understand the essence of the world's major stock indices, as well as methods for their calculation. Shares are classified on most exchanges on their liquidity, that is, by how easily they can be bought and sold. Typically, the larger the organization, the more investors buy and sell its shares and the more broker-dealers are willing to quote them.

Movement and, therefore, the state of the stock markets is characterized by indices such as the index of 100 stocks Financial Times - London Stock Exchange (FTSE 100 or Foot-sie, UK); Nikkei 225 (Japan); Dow Jones Industrial Average (DJIA, USA). This allows investors to assess the state of the stock markets in general.

DJIA index (Dow Jones Industrial Average) is a modern version of the world's first stock index, which was created by Charles Henry Dow (1851-1902). Studying the closing price on the shares, the Dow concluded that the creation of a "barometer", or stock index, which would enable investors to quantitatively characterize the state of the market.

Stock index is a measure of revenue that could be obtained by the holder of a specific set of shares. This is a numerical representation of price movement of shares set on their base value of the initial date in the past.

There are two basic ways of defining indices on the basis of stock prices or representative basket of selected organizations. Share price to reduce the average basket usually by adding the - arithmetic code - or by multiplying - geometric index. The value of the average of changes with stock prices, reflecting the state of the market or sector.In the case of arithmetic indices(DJIA), prices are added and divided by the number of shares in the basket. In the process of averaging weighted stock price (FTSE 100, Standard & Poor's 500) each organization based on the number of shares in issue is used, so that large-cap organizations have a more significant impact on the movement of the index.

Geometric indices are calculated by multiplying the price then extract the root n-th degree, where n - number of shares in the basket. Geometric indices are not weighted and, consequently, need to be modified to take into account, in particular the bonus issue and the issue of ordinary shares. Examples of geometric indices are British FT 30 and US Value Line.Arithmetic and geometric indices for the same shares, having the same initial value, while driving stock prices behave differently. Geometric index grows more slowly and falls faster than arithmetic, that due to the method of its calculation. Arithmetic indices better reflect the increase or decrease in value of the shares.

The following table presents the most famous

stock indices and their parameters

Index | Exchanges | Structure | Weightingmethod | Method of calculation | Initial value |

DJIA | New York Stock ExchangeNASDAQ | 30 blue chips NYSE | Price-weighted | Arithmetic | 240 |

Hang Seng | Hong Kong Stock Exchange | 30 shares of HKEx | Capitalization-weighted | 100 | |

CAC40 | Euronext Paris | 40 shares of Euronext Paris | 1000 | ||

DAX30 | Frankfurt Stock Exchange | Sample of 30 blue chips | 1000 | ||

Nikkei 225 | Tokyo Stock Exchange | 225 shares of TSE | Price-weighted | 176 | |

S&P500 | NYSE, NASDAQ | 500 shares of NYSE, divided into 4 groups | Free-float capitalization-weighted | 10 | |

FTSE100 | London Stock Exchange | Shares of the 100 companies | Capitalization-weighted | 100 |

References:

1. Rovionov V.M., “Stock Indices”, http://www.elitarium.ru/2005/09/01/fondovye indeksy.html.

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