Global stock indices: beginner’s guide

Before analysing in detail the indices of the main stock exchanges in the world, let us briefly recall the definition of a stock index and its functions. A stock index is a benchmark that replicates the performance of a group of shares in a particular market (e.g. technology stocks, energy stocks, etc.). Depending on its objectives, the composition of the index can change over time depending on the performance of the underlying shares.

Analysts and investors around the world use indices to compare investment returns by comparing current stock prices with past ones and measuring changes in value over time.

What is a stock index?

A stock index is a set of stocks with predetermined and shared characteristics, often used as a benchmark for the performance of a larger group of companies or stocks with similar characteristics. The creator of the index chooses the characteristics and stocks to include, with relatively infrequent changes to the composition.

The inclusion criteria of stock indices can range from objective quantitative characteristics such as market capitalisation or GICS classification to more subjective criteria such as a company’s exposure to business opportunities such as automation and robotics. Stock indices are typically transparent and investable, i.e. they include listed stocks, how they were selected, and what the index tracks overall.

Stock indices aim to provide investors with a more practical way to evaluate and monitor the performance of the stock market in general and/or specific segments of the market. Indices are typically used by investors as benchmarks.

For example, it is common to compare the performance of stock portfolios that mainly hold US stocks with the S&P 500 index. Similarly, the Dow Jones Industrial Average (or Dow Jones), the S&P 500 and the NASDAQ are collectively considered reflections of the overall health of the US stock market (and the economy, to some extent), while narrower indices such as the Dow Jones Transportation or the S&P Banks index are considered as benchmarks for their respective sectors.

Why are stock indices important?

Indices are used in all global markets by finance professionals, institutions and individuals for the following purposes:

• Stock market indices are the most significant benchmarks and are widely used in the financial industry.
• Investors and traders use stock market indices to analyse the market and manage the rebalancing of their investment portfolios.
• Financial institutions use stock market indices to manage their clients’ investment portfolios and compare performance.
• Stock indices indicate the mood and sentiment of the market at a given time. Investors observe market trends by analysing indices.
• The stock index helps to identify profitable stocks and indicates their performance compared to their peers.
• Investors can make passive investments by analysing stock indices and choosing index funds that imitate the performance of an index.

What are the main global stock indices?

Below, we present some of the most important global stock indices. Let’s dive in!

Global stock indices: Wall Street

• S&P 500
• Nasdaq
• Dow Jones
• Russell 2000

Global stock indices: European stock exchanges

• Eurostoxx 50 (Main 50 European companies)
• FSTE MIB (Italy)
• IBEX 35 (Spain)
• FTSE 100 (UK)
• DAX 40 (Germany)
• CAC 40 (France)
• AEX (Netherlands)

Global stock indices: Asian stock exchanges

• China A50 (China)
• Nikkei (Japan)
• Hang seng (Hong Kong)
• Kospi (South Korea)

Global stock indices: S&P 500

The S&P 500 index, or Standard & Poor’s 500 Index, is a market capitalisation-weighted index of the 500 largest publicly traded companies in the United States. It is not an exact list of the first 500 US companies by market capitalisation, as the index includes other criteria. However, the S&P 500 index is considered one of the best indicators of the performance of the main American stocks and, by extension, of the US stock market as a whole.

The S&P 500 index is one of the most widely used indexes for the US stock market. These 500 companies represent the largest and most liquid companies in the United States, from technology and software companies to banks and manufacturers. Although the index was created by a private company, the S&P 500 is now a popular benchmark for the overall market economy performance.

Global indices: Nasdaq

The Nasdaq Composite Index is a market capitalisation-weighted index of over 3,700 stocks listed on the Nasdaq stock exchange. Being a broad and heavily weighted index in the technology sector, the Nasdaq Composite Index has become a benchmark in all financial market reports.

The Nasdaq Composite includes stocks of foreign companies, unlike the S&P 500 index and the Dow Jones Industrial Average, the other two most frequently cited market benchmarks.

Global indices: Dow Jones

Dow Jones, or more precisely Dow Jones & Company, is one of the largest economic and financial news companies in the world. Charles Dow, Edward Jones, and Charles Bergstresser founded the company in the 19th century. In addition to the famous Dow Jones Industrial Average, the company has also created other indices.

Among the various stock indices, there are four main ones that include some of the main Dow Jones stocks with best dividends:

1. Dow Jones Industrial Average (DJIA): it is the most important of all and reflects the performance of the 30 most important and representative industrial companies in the United States.
2. Dow Jones Utility Average (DJUA): contains the titles of the 15 largest companies in the utility industry, such as gas or electricity.
3. Dow Jones Transportation Average (DJTA): includes the 20 largest transport and distribution companies.
4. Dow Jones Composite Average (DJCA): measures the performance of 65 companies in the previous three indices. The companies that make up the Dow Jones Composite Average may vary according to certain criteria, but most of them are large-cap companies.

Check out this Dow Jones guide for more information about this stock index.

Global stock indices: Russell 2000

The Russell Index is divided into several component indices, including the Russell 1000, the Russell 2000 and the Russell 3000. The Russell 1000 monitors the first 1,000 companies in terms of market capitalisation, while the Russell 2000 tracks the next 2,000 companies. Finally, the Russell 3000 includes all the companies followed by the previous two indices.

Global stock indices: Euro Stoxx 50

The EURO STOXX 50 index is a market capitalisation-weighted index of 50 European blue-chip companies operating in the Eurozone countries. The components are selected from the EURO STOXX index, which includes large, medium, and small capitalisation stocks in the European area.

The EURO STOXX index includes companies of all market capitalisation levels from Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands and Spain. The EURO STOXX 50 typically represents around 60% of the EURO STOXX index. The EURO STOXX 50 is reviewed annually in September to check for any changes in the index components.

Global indices: FTSE MIB

The Financial Times Stock Exchange Milano Stock Index (FTSE MIB) is the most significant index of the Italian Stock Exchange. The Index comprises the 40 most traded stocks on the Exchange, consisting of the main companies of the ICB (Industry Classification Benchmark) sectors in Italy. The Index was developed from the stocks traded on the main stock market of Borsa Italiana.

What are the main Italian stock indices?

The main Italian stock indices are:

• FTSE MIB – The FTSE MIB Index measures the performance of 40 Italian stocks and aims to reproduce the sector weightings of the wider Italian stock market. It is the main benchmark of the Italian stock markets and captures around 80% of the internal market capitalisation.
• FTSE Italia Mid Cap – This index is composed of the first 60 stocks in the capitalisation ranking, outside the FTSE MIB Index
• FTSE Italia Small Cap – The index captures the performance of all other small stocks, outside the FTSE MIB index and the FTSE Italia Mid Cap. It does not include foreign companies and
• FTSE Italia All-Share – The index includes all the constituent elements of the FTSE MIB, FTSE Italia Mid Cap and FTSE Italia Small Cap indices.

Global indices: FTSE 100

The FTSE 100 is the financial markets index of the London Stock Exchange. It is composed of the 100 largest market capitalisation companies listed on the LSE. It is the acronym of Financial Times Stock Exchange 100 and is in fact controlled by the magazine Financial Times.

The index is managed by the FTSE Group, a subsidiary of the London Stock Exchange (LSE) Group. The capitalisation of the companies that make up the index represents 70% of the total value of the London stock market, which is why many investors opt for the best FTSE100 ETFs.

Global stock indices: DAX 40

The DAX 40 groups the 40 companies with the highest market capitalisation of the Frankfurt Stock Exchange (until September 2021 it was called DAX 30 because there were only 30 listed companies). Among the highest capitalisation stocks are Linde, Siemens, Volkswagen, and Deutsche Telekom.

World stock indices: CAC 40

The CAC 40 (Cotation Assistée en Continu) includes 40 stock titles of the Paris Stock Exchange. The maximum intraday value of the CAC 40 index was reached on September 4, 2000 at 6944.77 points. It is a floating index, that is, it has periodic adjustments of the components.

World indices: Nikkei

The Nikkei is the most popular stock index of the Japanese market, composed of the 225 largest companies listed on the Tokyo Stock Exchange. These companies have been selected since 1971. It is calculated by the Nihon Keizai Shinbun (Japanese Business Daily), from whose initials the index derives its name.

The values of the Nikkei index are weighted according to the price rather than capitalisation.

The largest share of the Nikkei index is held by 66 industrial companies, 50 cyclical consumer companies and 24 financial companies. The components of the index are reviewed annually to reflect changes in the market environment. Changes in the composition of the index are made in October, although exceptionally they can take place on a different date.

Finally, some of the companies included in the index are Toyota Motor, Yamaha, Toshiba, Suzuki Motor, Sony, Pioneer, Nissan Motor, Kanebo, Japan Tobacco, Bridgestone and Konica. These stocks are characterised by high liquidity.

Global indices: IBEX 35

The IBEX 35 is the main index of the Spanish stock market. It is compiled by the company BME with the aim of observing the profitability of Spanish stocks. It shows the state of the stock market and is a good indicator of the state of the Spanish economy.

Global indices: Hang Seng

The Hang Seng 50 index is a stock index that includes the 50 largest companies listed on the Hong Kong stock exchange. The Hang Seng has a market capitalisation of approximately $1.3 billion and is one of the eight major global stock indices.

The Hang Seng index was established in 1969 and is managed by Hang Seng Bank, one of the largest banks in Hong Kong, which manages the indices and economic data of the Hong Kong markets.

The companies that make up this index alone represent more than 60% of the total market capitalisation. In fact, many of the major Chinese companies have been listed on the index, a sign of the economic strength of these companies in particular and China in general.

Global indices: Shanghai Composite

The SSE Index in Shanghai is one of the main global indices and the most important index of the Chinese mainland stock market, which measures the value of the most representative stocks by market capitalisation (more than 1,500 Chinese companies).

Unlike the Hong Kong Stock Exchange, the Shanghai Stock Exchange is not yet fully open to foreign investors due to the tight control exercised by the Chinese authorities.

How to invest or trade indices

The main tools for investing in indices are ETFs. Traders may use derivatives, too, such as CFDs, futures, and options.

Best brokers for indices:

To start trading or investing in indices, have a look at the following articles:

• Best ETF brokers
• Best brokers for CFDs
• Best brokers for options
• Best brokers for beginners

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