What is a stock index?

The definition of stock index is the mathematical weighting of a group of securities listed on the same market to measure the growth or decline of their shares. In a certain way, its objective is to check the strength or weakness of the securities that make up said index.

In a more technical way, it can be ensured that the stock index concept is a numerical value that tries to show the fluctuations in value or returns of the values ​​that compose it. These securities present a series of common characteristics such as belonging to the same industry, the same exchange or presenting a capitalization bursátil similar.

The best-known stock index in the world, and the oldest, is the American Dow Jones, which was launched by the Wall Street Journal and Charles Henry Dow at the end of the 35th century with the purpose of analyzing the country's financial activity. . In Spain, the most important is the Ibex 35, where there are XNUMX companies with great economic potential such as Banco Santander, Telefónica or Inditex.

Functions of stock indices:

Stock indices are used for various purposes. The main ones are the following:

  • Measure the profitability and the risk of a market.
  • They show the market sentiment.
  • They are used as a benchmark to measure the performance of an asset manager. They compare the return and risk achieved by that manager with that of the benchmark.
  • Create portfolios that emulate the behavior of the index.
  • Measure the beta of a financial asset.

A stock index can be constructed in different ways.

  • Weighted price index: it is the arithmetic mean of the price of the securities that make up the index.
  • Weighted capitalization index: it is created according to the market capitalization of each security that makes up the index.
  • Equally weighted indices: this percentage is obtained from the arithmetic mean of the profitability of each of the index values.

The most important stock indices

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