Buying Shares – Chapter 7: Stock Indexes – What do they stand for?

This is chapter number 7 out of 19. Read the rest:

Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1: Introduction
Read Buying Shares – Chapter 2: What are Stocks and Shares?
Read Buying Shares – Chapter 3: Different Classes of Stocks
Read Buying Shares – Chapter 4: What affects ‘Stock Prices’?
Read Buying Shares – Chapter 5: Stock Markets
Read Buying Shares – Chapter 6: Stock Exchanges, Why are companies listing on a stock exchange today?

The London Stock Exchange has thousands of listed companies and every year more and more look for approval to be associates of the exchange. It becomes hard to figure out which stocks are worth investing in.

Different businesses have various ways to assess their performance. For example, if an ice cream company depends on hot weather to make a profit, during extended cold periods, it is expected to perform poorly. On the contrary, in hot weather, the business will do fine. How do you measure this kind of a company against another whose business has nothing to do with the climate?

That is where the stock market helps. A stock market index is a technique to measure the relative health of a segment of the stock market. By comparing the performance of a company to the performance of other companies in the same kind of business, an investor is able to make a rational judgment on the best investment.

There are a number of types of stock indexes. The broad based index is the most common type. In UK, we have FTSE 100 which compares the top 100 companies in the Financial Times Stock Exchange. The FTSE 250 then is the index of the top 250 companies on this stock exchange. Other examples include French CAC 40, the US Dow Jones and German DAX.

The figure below gives the current prices for the Dow Jones Index. Rather then looking at the price for a particular stock traded on the Dow Jones it looks at the entire index.

You can see that the index has dropped by 34.01 points or 0.40% since the last noted price.

As stock indexes are all about trying to obtain the worth of a class of stocks, there are various methods to conclude this price. Price weighted indexes is one example- this is calculated by adding the prices of all the stocks in the index dividing by the total number of stocks. Market value weighted indexes are the general methods to work out the worth of stock indexes by looking at the proportion to its market value.

A market share weighted index also called as capitalization-weighted index, considers the magnitude of the company as well as its price. So, even a minute change in the price of one big company will affect the value of the index.

Read Buying Shares – Chapter 8: How do I Trade Shares?
Read Buying Shares – Chapter 9: What kind of a Trader are you?
Read Buying Shares – Chapter 10: Investing Methodology: Planning Trades and Picking Stocks
Read Buying Shares – Chapter 11: Placing an order – The technicalities involved, Step 1 – Open a Share Dealing
Read Buying Shares – Chapter 12: Step 2 – Research the Stocks
Read Buying Shares – Chapter 13: How to Read Quotes of Shares
Read Buying Shares – Chapter 14: Buying and selling shares- how’s it done?
Read Buying Shares – Chapter 15: Buying Shares – The Rules
Read Buying Shares – Chapter 16: Tips for Stock Market Investing
Read Buying Shares – Chapter 17: The Difference between Stocks and Shares
Read Buying Shares – Chapter 18: Q & A session
Read Buying Shares – Chapter 19: Glossary words to learn