Part 17: Indices (S&P 500, Nasdaq 100, FTSE 100 and others)

Welcome back to The Apricot Investor’s Glossary! In this post, we’ll explore indices – an important concept for understanding and navigating the stock market.

What is an Index?

An index is like a snapshot of how that specific part of the market is performing. Think of it as a carefully selected group of stocks that are tracked together to measure the overall health and direction of a specific market area.

Why Are Indices Important?

Indices serve several key purposes for investors:

• Performance Benchmark: They provide a benchmark to measure the performance of individual stocks or investment portfolios. For example, if your portfolio returns 10% while the S&P 500 returns 8%, you’ve outperformed the market.
• Market Indicators: Indices reflect investor sentiment and overall market trends. A rising index generally suggests a positive outlook for the market, while a falling index may indicate concerns about the economy.
• Investment Tool: There are investment products, such as index funds and ETFs, that track specific indices. This allows investors to gain diversified exposure to a particular market segment with a single investment.

Popular Indices

Some of the most widely followed indices include:

• S&P 500: Tracks the performance of 500 large-cap U.S. companies, representing approximately 80% of the total U.S. stock market capitalization.
• Nasdaq 100: Comprises 100 of the largest non-financial companies listed on the Nasdaq stock exchange, heavily weighted towards technology companies.
• Dow Jones Industrial Average (DJIA): Tracks the performance of 30 large, publicly owned companies based in the United States.
• FTSE 100: Tracks the 100 largest companies listed on the London Stock Exchange.
• Euro Stoxx 50: Represents the performance of 50 leading blue-chip companies from 11 Eurozone countries.
• DAX 40: Comprises 40 major German companies trading on the Frankfurt Stock Exchange.
• CAC 40: Tracks the 40 largest companies listed on Euronext Paris.

How Are Indices Constructed?

Indices are constructed using various methodologies, including:

• Market-Cap Weighted: The weight of each company in the index is determined by its market capitalization. Larger companies have a greater influence on the index’s performance. For example, The S&P 500 is a market-cap-weighted index. This means that companies like Apple and Microsoft, with their massive market capitalizations, have a much larger impact on the index’s movements compared to smaller companies.
• Price-Weighted: The weight of each company is determined by its share price. Higher-priced stocks have a greater impact on the index. For example, The Dow Jones Industrial Average (DJIA) is a price-weighted index. This means a company with a $300 share price will have three times the influence of a company with a $100 share price, regardless of their actual market value.
• Equal-Weighted: Each company in the index is given equal weight, regardless of its size or price.

Investing in Indices

Investors can gain exposure to indices through:

• Index Funds: These funds passively track a specific index, aiming to replicate its performance.
• Exchange-Traded Funds (ETFs): These are similar to index funds but trade on stock exchanges like individual stocks. Learn more about ETFs in the sixth episode of Apricot Talks: The Smart Investor’s Podcast.

Indices are a valuable tool for investors to understand market trends, benchmark performance, and gain diversified exposure to specific market segments. By understanding how indices work, investors can make more informed investment decisions.

It’s important to remember that investments are subject to market fluctuations and carry inherent risks. Consider your financial goals and risk tolerance before investing.

Apricot Capital is regulated by the Central Bank of Armenia.

The examples in this text are for illustrative purposes only. This does not constitute investment advice or a recommendation to buy or sell any specific investment instrument. The past performance mentioned in this text is not indicative of future results.