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What Is Index

What Is Index

💡Take Away

  • An index is a numerical indicator that tracks the price performance of a specific group of stocks.

  • Indices can represent industries, sectors, or regions. Some indices include only a handful of securities, while others cover over 1,000.

  • ETFs and index funds replicate these indices, allowing you to benefit from their performance at a low cost.

  • The most well-known German index is the DAX (Deutscher Aktienindex), which tracks the top 40 German companies.

What is an Index?

An index is calculated to illustrate price developments.

Example
The Consumer Price Index (CPI) is determined by the Federal Statistical Office of Germany, which examines the prices of 650 goods each month. These goods represent what German households typically consume, including categories like food, housing, and transportation. Every month, the prices of the same basket of goods are checked. By analyzing the price changes of this basket, inflation can be measured.

Similarly, a stock index tracks the price movements of numerous stocks. It provides a snapshot of how a specific group of stocks is performing, making it easier to understand market trends.

Schwankungen von Aktienindizes

The German Stock Index (DAX)

The DAX (Deutscher Aktienindex), the German stock index, tracks the performance of the 40 largest German companies. It serves as a barometer for the stock market.

To be included in the DAX, a company must meet specific criteria. For example, DAX companies must:

  • Be headquartered in Germany,
  • Be listed on the stock exchange,
  • Be among the 40 largest German companies by free-float market capitalization.

During trading hours, Xetra calculates the DAX every second, providing real-time updates on its performance.

Xetra

The Deutsche Börse AG is a company that provides stock exchange infrastructure, ensuring that trading functions smoothly. One of its most significant trading platforms is Xetra, which stands for “Exchange Electronic Trading”. Xetra enables electronic stock exchange trading, allowing you to buy and sell stocks and ETFs.

Similar to a stock price, you can also track an index using a chart. However, the value of an index does not represent a single company but summarizes the performance of an entire market. For example, the DAX shows how the top 40 German companies have performed over the past minutes, weeks, or years.

Fluctuations in Stock Indices

Indices generally fluctuate less than individual stocks because they represent multiple companies, resulting in lower volatility. However, indices can still experience significant fluctuations, especially during political or economic crises. For example, at the onset of the COVID-19 pandemic, the DAX dropped below 9,000 points in a short period, reaching its lowest level since February 2016.

Volatility The term volatility generally refers to fluctuations. High volatility means that a stock price or market value experiences significant swings.

Index Types

There are various indices that reflect different developments. Depending on the information you need, you may refer to different indices. In the investment sector, the most important indices are those that track price or performance. Every country has a benchmark index that represents its top companies.

Price Index

  • A price index reflects the pure price development of stocks.
    • In the case of a dividend payout, the dividend amount is subtracted from the stock’s value, causing the index to drop at the time of the payout.
  • The most well-known example of a price index is the Dow Jones Industrial Average (DJIA), which tracks the 30 largest publicly traded companies in the United States.
Dividend A company can share its profits with shareholders by distributing dividends. Shareholders benefit from this cash flow, which is freely available money. To pay dividends, a company does not necessarily need to make a profit; it can also draw this amount from other sources. Dividend payments are entirely voluntary, and a company may choose to reinvest its profits instead.

Performance Index

  • A performance index, also known as a total return index, measures the growth in value of capital investments.
  • Unlike a price index, the index publisher includes capital changes and dividend payouts in the calculation. Dividends are reinvested, meaning they are added back into the index. As a result, the performance index does not lose value after a dividend payout.
  • One of the most well-known performance indices is the DAX-40. The DAX Performance Index receives significantly more international attention than the DAX Price Index because it provides a comprehensive overview of the index’s total value development by including dividends.

Benchmark Index

  • A benchmark index lists the most important companies of a nation.

  • For example, the DAX is the German benchmark index, and the Nikkei 225 is the Japanese benchmark index.

    Was ist ein Leitindex?

  • Using a benchmark index, you can gain a good overview of a country’s stock market. Geopolitical decisions often have significant impacts on companies, and these effects can frequently be observed in the index.

How are Indices Weighted?

The criteria for inclusion in an index depend on the organization that publishes it.

  • The DAX is calculated by Deutsche Börse AG, which uses free float and market capitalization to determine which 40 companies are included.
    • Free float refers to the number of shares available for trading by investors, while market capitalization indicates the total value of a company’s outstanding shares.
    • Once a year—in September—Deutsche Börse AG reviews and decides on changes to the DAX. Companies may be removed from the DAX 40, or new companies may be added.
  • The Dow Jones, the most important U.S. index, uses a different weighting method: it is price-weighted. The higher a stock’s price, the greater its weight in the index.
Stock Exchange A stock exchange is a marketplace where stocks and other securities are traded, bringing buyers and sellers together. Stock exchanges have fixed trading hours and rules. In Germany, there are eight securities exchanges, with the Frankfurt Stock Exchange being the most important.

Important Stock Indices

Overview of Important Stock Indices

IndexRegionDescription
MSCI WorldGlobalThe MSCI World Index (Morgan Stanley Capital International World Index)
  • A highly important stock market benchmark that provides insights into the global equity market
  • Tracks over 1,600 stocks from 23 developed countries.
  • Excludes emerging markets (such as developing countries) and small-cap stocks (shares of smaller companies). U.S. companies make up approximately 50% of the index, making it heavily influenced by the performance of the U.S. stock market.
    • MSCI Emerging MarketsEmerging Markets
  • Tracks the performance of approximately 1,200 companies from 24 emerging markets. These companies are primarily large-cap and mid-cap, meaning they have high and medium market capitalizations
  • The index is weighted by free-float market capitalization.
  • Currently, the index represents about 13% of the global market capitalization.
    • MSCI ACWIGlobalThe MSCI All Countries World Index (ACWI) combines the MSCI World and MSCI Emerging Markets, covering 2,750 stocks from 23 developed and 24 emerging markets.
  • Emerging market stocks account for approximately 10% of the index
  • U.S. companies account for 63%.
    • DAXGermany
  • The DAX tracks the 40 largest companies listed on the Frankfurt Stock Exchange. However, not all companies contribute equally to the index’s value.
  • It represents about 75% of the market capitalization in Frankfurt and is a key indicator of the German economy.
  • The DAX tends to be more volatile compared to British and U.S. indices.
    • S&P 500USAThe S&P 500 includes the 500 largest companies listed on the NYSE or NASDAQ. It represents about 80% of the U.S. stock market. It provides a comprehensive overview of the U.S. stock market’s performance and is considered by many to be the best indicator of the U.S. equity market.
    FTSE 100UK
  • The FTSE 100 tracks the 100 largest companies by market capitalization listed on the London Stock Exchange.
  • It represents about 81% of the UK market and is a key indicator of British corporate wealth, which holds a similar importance for the British market as the S&P 500 does for the U.S. market.
  • The FTSE 100 represents approximately 81% of the total market value of the London Stock Exchange.
    • NASDAQ 100USAThe NASDAQ 100 is a technology-heavy index on the NASDAQ exchange, comprising 100 stocks of technology companies.
  • The companies in the NASDAQ 100 are weighted based on their market capitalization.
  • Due to its heavy concentration in fast-growing, often high-risk technology companies, the NASDAQ 100 tends to be the most volatile among the three major U.S. indices (Dow Jones, S&P 500, and NASDAQ 100).
    • Dow JonesUSAThe Dow Jones Industrial Average tracks 30 of the largest U.S. companies and is price-weighted, meaning the value of the index is based on the stock prices of its components rather than their market capitalization. It is one of the oldest and most widely followed indices in the world.
    Euro Stoxx 50EuropeThe Euro Stoxx 50 includes the 50 largest publicly traded companies in the Eurozone. It is considered a leading benchmark for the European stock market, with France and Germany being the most represented countries. It is often referred to as the European benchmark index.
    HSCEIChinaThe Hang Seng China Enterprises Index tracks 50 mainland Chinese companies listed on the Hong Kong Stock Exchange. These mainland Chinese stocks traded in Hong Kong are also known as H-shares.
    The index is weighted based on the free-float market capitalization of the companies, with no single stock allowed to exceed 10% of the index’s weight.
    SMISwitzerlandThe Swiss Market Index (SMI) tracks the 20 largest companies on the Swiss Exchange. It represents about 90% of the market capitalization and trading volume in Switzerland.
    Nikkei 225JapanThe Nikkei 225 is Japan’s leading index, tracking 225 companies listed on the Tokyo Stock Exchange. It is one of the most important indices in Asia.

    From Index to ETF

    You can not invest directly in a stock index. However, some fund providers replicate indices exactly, allowing you to benefit from the performance of a stock index. Exchange-Traded Funds (ETFs) automatically track the performance of indices. There are ETFs for almost all stock indices, including the DAX, MSCI World, and S&P 500. You can easily buy shares of ETFs through an online broker.

    ETFs are significantly cheaper compared to actively managed funds. Actively managed funds require entire teams of analysts and fund managers, whose salaries drive up costs. ETFs, on the other hand, operate fully automatically, following the index. As an investment model, ETFs are becoming increasingly popular among private investors because they offer lower risk and costs compared to investing in individual stocks.