Investing in the stock market can be one of the ways to achieve your financial goals. However, before you start your journey, you should know some things about stock markets. For example, you should learn what stock market indices are and which are the most popular ones among investors.
A simplified view of a broad market segment is provided by an index, saving investors the time and effort of analysing each individual asset that makes up the index. Learning the fundamentals of stock market indices helps you build a proper investment plan.
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Surely you have read about the FTSE 100 Index in London or the DAX 40 Index in Germany, but you may be wondering how they can affect your portfolio.
This blog will share some insights about investing in the stock market and which the top stock market indices are.
What are stock market indices?
The success of the stock market may be measured by looking at several indexes that track the movement of a selected set of stocks or the whole market. They help traders and analysts make sense of the stock market's general trends and patterns. The stocks included in an index are chosen according to a predetermined process. A stock market index is comprised of a subset of stocks. Market capitalization, industry categorization, and trading volume are common criteria for stock index inclusion.
While some stock market indices attempt to be representative of the whole market, others narrow down on certain industries, geographic regions, or investing styles. Weighted average of the prices or market values of the stocks comprising an index is often used to determine its value.
In this way, the index can serve as a benchmark by reflecting the performance of the underlying equities. Stock market investors use stock indexes for a wide range of goals, such as comparing their own performance to other popular indices, designing and building investment portfolios, and analysing market movements.
These are the most popular stock market indices
The US, the UK and the German economies are among the largest in the world. Now that you know what stock market indices are, we will share with you some valuable insights regarding the top stock market indices.
What is the FTSE 100 Index?
The FTSE 100 Index (Financial Times Stock Exchange Index) or “Footsie” as you probably know it from financial news headlines is the market capitalization weighted index that tracks the performance of the 100 largest firms traded on the London Stock Exchange (LSE). It is commonly used by financial experts as a measurement of the UK stock market's growth.
A bit more than 80% of the total market value of all firms listed on the UK stock market is held by the companies featured in the FTSE 100.
In 1984, the FTSE 100 index was introduced to the investing community, taking the place of the FT30 Index. Finance, energy, healthcare, consumer products, and other industries are all represented. The performance of the FTSE 100 index is influenced more by the larger firms.
The FTSE 100 is often used by investors as a barometer for the health and trend of the UK stock market as a whole. Investors tend to use the FTSE 100 as a way to determine the UK’s stock market health. It is useful for keeping tabs on market trends and deciding where to put your money because of the information it gives on the success of the UK's major publicly traded firms.
What is the S&P 500 Index? (SP500)
The S&P 500 stock market index follows the actions of 500 of the top publicly listed firms in the United States; it is also known as the Standard & Poor's 500 Index. Firms included in the index are required to have a minimum market capitalization of about $6.1 billion. The index is representative of many different industries, such as IT, healthcare, banking, retail, and consumer goods.
It is common practice for investors and financial experts to use the S&P 500 as a proxy for the trajectory of the U.S. stock market. It is capitalization-weighted, thus larger firms have a higher bearing on the index's overall performance.
Following the S&P 500's historical data allows investors to study patterns and make calculated wagers. Apple, Microsoft, and Google are just a few of the well-known names in the technology industry that make up the top 25 businesses in the S&P 500. Index funds and exchange-traded funds (ETFs) are two types of financial products that seek to mirror the performance of the S&P 500 index and give investors diversified exposure to the U.S. stock market.
Meet the Dow Jones Industrial Average Index (Dow 30)
The Dow Jones Industrial Average (DIJA) stock market index follows the progress of 30 large-cap businesses traded on major U.S. stock exchanges; investors with years of experience in the market usually call it the "Dow Jones Index." It's one of the world's oldest and most well-known stock market indices. Each stock in the Dow Jones Index is given the same relative importance regardless of its market capitalisation because it is price-weighted.
Investors and financial experts frequently look to the index as a benchmark for measuring the market's overall performance. It features businesses from many different industries, including IT, healthcare, banking, and retail. The Dow Jones Index measures the combined market value of 30 large, publicly traded companies. Some of the companies included in the Dow Jones Index are Intel, Coca Cola, Microsoft, Nike and others.
The Dow Jones Index's historical data may help traders keep tabs on movements, evaluate the current market, and plan for the future. It's worth noting that the Dow Jones Index is a narrower representation of the market than the S&P 500.
The Dow Jones Index is closely watched by investors and financial professionals as a leading predictor of the success of the U.S. stock market.
DAX: Germany’s Stock Market Index (DAX 40)
Seasoned investors may remember the time that it was called DAX 30. DAX 40 (renamed in September 2021) is a widely followed stock market index that tracks the value of 40 of the most actively traded and market-capitalized stocks on Germany's Frankfurt Stock Exchange (FSE). It's an important barometer of Germany's economic health and a window into the state of the economy there.
The index tracks the overall performance of the German stock market and is made up of blue-chip businesses selected for their size and liquidity. Some of the most important companies included in the DAX 40 are Bayer, Airbus, Adidas, BMW, Deutsche Bank and others.
The DAX 40 is actively watched by market participants because it provides access to trading on and investment in German stocks. The index is widely recognised as a leading economic indicator for Germany. The DAX 40 is representative of the whole business landscape in Germany due to the wide variety of industries it covers.
Investors seeking exposure to the German market or attempting to analyse the general health of the German economy would do well to have a thorough understanding of the index's structure and dynamics.
Investing in the top stock market indices with Admirals
Now that you understand which the top stock market indices are, you have gained valuable knowledge that could prove helpful in the future. Investors can gain exposure to stock indices by investing in mutual funds or Exchange-Traded Funds (ETFs) which track the desired index. These types of funds track stock indices by using investor money to buy all the component stocks and mirror the performance of the overall index. For example, in the case of the S&P 500, a fund would purchase shares in all 500 companies which make up the index, in proportion to their respective weightings.
Building a successful investment portfolio requires making the right choices while ensuring that you use risk management tools to minimise the danger of losing your funds. If you feel confident and you have the necessary experience, Admirals offers a wide range of instruments to satisfy your investment needs. At Admirals, we offer the ability to invest in over 4,500 stocks and more than 200 Exchange-Traded Funds (ETFs).
If you would like to start investing with Admirals, click the banner below to register an account today:
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.