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Financial Dictionary - Stock indices

Stock indices

Stock indexes are essentially aggregates of a particular type of securities.

Nowadays we can find various types of indexes, each comprising a different type of instrument. For example, there are indexes by market, by sector, by company size, or by type of instrument.

They are mainly used to measure the global ups and downs of the market segment they represent and to graphically observe and depict the historical performance of that economy.

For example, “national” indexes such as the IBEX 35, the DAX or the S&P 500 serve as a proxy for economic growth and development in the country concerned. However, if we look at the Russell 2000, what it shows us is an overall picture of US small-cap companies.

In other words, they are like a thermometer measuring the health of a market at a particular time. They measure the performance of a collection of shares grouped according to certain criteria, such as the area in which the companies operate or their sector of activity.

Indexes also serve a useful benchmark function. In other words, we can compare the performance of a particular manager, portfolio, investment fund, and so forth, against the performance of an index.

They are also a benchmark or yardstick for instruments that seek to passively replicate the performance of these indices.

These instruments are mainly investment funds and ETFs.

Actively purchasing each of the instruments that make up an index and then adjusting the portfolio over time involves a great deal of work and is extremely costly from an operational standpoint. What these products do is to allow retail or individual investors to invest —in a single transaction— in a particular index through a fund or ETF that replicates it.

While there is a seemingly endless number of indexes to choose from, with notable examples including: On a global scale, the MSCI World and S&P Global. In the United States, the Dow Jones, S&P 500 and NASDAQ 100. In Europe, the Eurostoxx 50, the German DAX 40, the London FTSE 100 and the Spanish IBEX 35. Notable among the Asian indices are Japan's Nikkei 225 and China's SSE Composite Index, while in South America we have the Brazilian Bovespa, among others.

Aside from the national (or global) indexes, there are also other indexes that replicate sectors, such as technology, fixed income based on duration, or commodities (gold, silver, soybeans, wheat, etc.), energy (oil, natural gas, etc.).

In addition to investment funds and ETFs, these indexes often include other products such as financial derivatives (or futures), which can be used to invest or take positions in the index.


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