A stock index is a calculated average of the prices of selected stocks that represent a particular market or sector.
An index is like a ‘basket’ of stocks that provides a broad cross-section of an industry, sector or national economy. The collective performance of these stocks provides a good indication of the trends in the global market they represent.
In addition to allowing investors to track changes in the value of a stock market, indices also provide a useful benchmark for measuring the success of investment vehicles such as stock funds and portfolios.
Types of Stock Indices
world indices: These include some of the world’s largest companies. For example, the MSCI World Index measures 1,500 stocks drawn from each of the world’s developed markets. This index is often used as a benchmark for funds.
National indices: These indices show the performance of the equity market of a specific country, reflecting the opinions of investors about the shares included in that market. For example, the FTSE 100 represents the 100 largest UK companies as listed on the London Stock Exchange (LSE).
In Spain, the Ibex 35 is the main stock index, it is listed on the four stock exchanges in the country and is made up of the most liquid Spanish companies. Unlike other indices such as the Dow Jones, the Ibex 35 is a market capitalization index, where all companies have the same weight for their weighting.
Sector indices: These are more specialized indices, designed to track the performance of specific sectors or industries. The Morgan Stanley Biotech Index, for example, tracks 36 US companies in the biotech industry.
currency indices: The ‘US Dollar Index’ measures the value of the dollar against other foreign currencies.
Market Sentiment Indices: The ‘CBOE (VIX) Index’ measures short-term volatility expectations. The measures are derived from share prices of the S&P 500.