Stock Market Indices
The general concept of indexes
For a qualitative assessment of the state of the securities market and the dynamics of its change, it is convenient to use a one-dimensional parameter, called the stock market index.
Fig. 1.16. Stock Market Structure
And in itself the value of this number does not carry in itself the essential information. It is not the very meaning of this number that is important, but the result of its comparison with the values it took earlier, i.e. the relative change (increase or decrease) of this number in comparison with the previous values.
Thus, indices are a tool for assessing the behavior of the securities market, which reflects the ongoing macroeconomic processes. With depressive phenomena in the economy, the indices fall. When there is an economic growth in the country, the indices are growing.
Depending on the choice of securities, information about which is used to calculate the index, it can characterize the stock market as a whole, the market of securities groups (government securities market, bond market, stock market, etc.), the market of valuable securities of any industry (oil and gas complex, telecommunications, transport, banks, etc.). A comparison of the dynamics of the behavior of these indices can show how the state of an industry changes with respect to the economy as a whole.
Stock indices are counted and published by various sources, which are usually information agencies and stock exchanges.
The indices are developed for various financial instruments, such as stocks, debt securities, foreign currency, etc. However, stock indices (called stock indices) are the most well-known.
Basic Index Types
Most of the stock indexes refers to either capitalization or price indices.
Capitalization indices. This type of index reflects the total capitalization of enterprises whose securities are used to calculate the index. The calculated index value is normalized to a certain base date. Recall that the capitalization of the enterprise is understood to be the product of the current market value of the shares issued by the enterprise for their quantity in circulation.
Most of the indices in the Western stock markets are capitalized. These include the Standard and Poor's indexes (S & P-500, S & P-400), the composite index of the New York Stock Exchange (NYSE), and the like. On the United States securities market, the MICEX and RTS indices are also capitalized.
Price indices, or indices with a weight equal to the price. Indices of this type are calculated as the arithmetic average of the shares of companies included in the base index list.
This type of index includes: the most famous - the industrial index of Dow Jones, other Dow Jones indexes, the index of the Tokyo Stock Exchange - Nikkei, the main index of the American Stock Exchange - AMEX, etc. On the United States stock market, this type of indices has not spread.
Using stock indexes
Building Economic Models
Indices are used as input for calculation of parameters in a number of economic models. For example, in the capital asset valuation model, which makes it possible to assess the behavior of individual stocks relative to the behavior of the stock market as a whole, the index is viewed as a one-dimensional parameter characterizing the best estimate of the market portfolio.
Investment Strategy Indicator
Indices can be considered as a tool for implementing an investment strategy. There are two passive investment strategies. One is to buy securities, keep them until their value:
• will not increase to a level that provides an acceptable level of efficiency of financial investments;
• Will not fall to a level at which financial losses will be above the allowable level.
The second investment strategy is to continuously maintain the investment portfolio in accordance with the structure of the stock index selection by selecting the stock index or by developing a methodology for calculating the stock index corresponding to the chosen investment strategy.
Note that consideration of capitalization indices as a strategy of behavior is possible, but in practice it is not very promising. This investment strategy requires the purchase of securities of enterprises in equal shares. However, in the presence of several dozen types of shares in the investment portfolio, maintaining such a portfolio in accordance with the chosen capitalization index requires significant overhead costs, which is associated with the continuous performance of purchase and sale transactions of foam securities to keep the portfolio up-to-date. As they say in such cases, transactional costs are high.
The underlying asset of financial instruments. Interest in the stock indices is also largely due to the fact that they are used as a basic asset for derivative financial instruments (index futures, index options, options for index futures). Derivative financial instruments provide an opportunity for participants in the stock market to implement various investment strategies, carry out insurance transactions in the stock market (hedge transactions), actively participate in speculative games, etc.
It should be noted that not all indices are used as a basic asset for derivative financial instruments. In particular, the company Dow Jones & amp; prohibits the use of the Dow Jones industrial index as a basis for futures and options.
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