Equity market indices are indicators of the stock market's performance. They are used as gauges of the market's overall health and are computed by tracking the value of a set of stocks over time. Indexes of the equity markets are important tools for traders and investors to evaluate the performance of their portfolios and make wise investment choices.
The value of equity market indices lies in their ability to offer a quick snapshot of the stock market's activity. They allow traders to follow the movements of specific industries, market segments, or the entire market. One can use this information to make informed trading decisions when buying or selling stocks or deciding which sectors or industries are doing well or poorly.
Equity market indices are calculated as the value of a sample basket of stocks. The underlying stocks' prices and weights in the index's basket determine the index's value. Each stock's importance in the index is determined by its market capitalization or the sum of the value of all its outstanding shares. Therefore, any one stock's impact on the index's value increases proportionally with its market capitalization.
Equity market indices can be divided into two categories: price-weighted and market-cap-weighted.
Price-weighted indices give more weight to higher-priced shares, whereas market-cap-weighted indices give more weight to companies with higher overall market values.
Since they give more weight to the stocks with the highest market capitalization, market-cap-weighted indices are typically seen as more representative of the entire market.
The S&P 500 serves as a standard for measuring the overall health and performance of the US stock market and is one of the world's most widely used equity market indices. It is a market capitalization-weighted index that measures the value of 500 large-cap companies listed on the NYSE or NASDAQ.
Key factors that impact the S&P 500
Economic data and indicators
The state of the US economy has a significant impact on the performance of the S&P 500. For example, economic data like GDP, inflation, and employment statistics can significantly impact the index's value.
S&P 500 company earnings reports and forecasts may also impact the index's value. While unfavorable earnings reports can result in lower stock prices, positive earnings reports can boost investor confidence and raise stock prices.
The S&P 500 index is usually heavily impacted by US Federal Reserve monetary policy changes, specifically announcements on interest rates or quantitative easing plans. Lower interest rates can stimulate economic growth and increase stock prices, while higher interest rates can slow economic growth and decrease stock prices.
Another popular equity market index that serves as a benchmark for the performance of technology and growth-oriented companies listed on the NASDAQ exchange is the NASDAQ Composite.
Key factors that impact the NASDAQ Composite
As a result of the NASDAQ Composite's heavy weighting of technology and growth-oriented companies, trends and developments in these industries can significantly impact the index's value. For instance, the index's value may increase due to developments in artificial intelligence, cloud computing, and e-commerce, while it may decrease due to setbacks or bad news.
Similar to the S&P 500, the value of the index can also be influenced by corporate earnings reports and guidance from NASDAQ Composite companies.
Dow Jones Industrial Average
The Dow Jones Industrial Average, also referred to as the Dow or DJIA is one of the world's most well-known and established equity market indices. It comprises 30 blue-chip businesses that are titans in their fields.
Key factors that impact the Dow Jones Industrial Average
The DJIA is affected by various macroeconomic indicators, including GDP growth, inflation, and interest rates. Positive figures will increase investor confidence and forge higher stock prices, while negative indicators cause a slide in values.
Corporate earnings reports and guidance from DJIA companies can affect the index's value, just like for the S&P 500 and the NASDAQ Composite. It's, therefore, important to be aware of corporate events such as AGMs and scheduled earnings reports from the companies in the index.
Elections, trade agreements, and policy changes are just a few examples of political events that affect the DJIA. These occurrences might cause the market to become more volatile and might significantly affect the index's value.
The main equity market index for the UK stock market is the FTSE 100, also known as the Financial Times Stock Exchange 100 Index. It consists of the top 100 companies by market capitalization that are listed on the London Stock Exchange (LSE).
Key factors that impact the FTSE 100
Economic indicators, such as GDP growth, inflation, and interest rates, affect the FTSE 100. Positive indicators can result in higher stock prices and greater investor confidence, whereas negative indicators can cause lower stock prices.
With the FTSE 100 priced in pounds sterling, any unexpected currency fluctuations usually impact the index's value. For businesses that receive a sizable portion of their revenue in foreign currencies, a stronger pound can result in lower stock prices, while a weaker pound can result in higher stock prices.
Political events like elections, policy changes, and ongoing Brexit implementation issues have an impact on the FTSE 100 as well. These occurrences can potentially increase market volatility and significantly affect the index's value.
The Nikkei 225, also referred to as the Nikkei Stock Average, serves as Japan's main equity market index for the Tokyo Stock Exchange (TSE). It comprises the top 225 market capitalization-ranked and most liquid companies listed on the TSE.
Key factors that impact the Nikkei 225
Numerous economic indicators, including GDP expansion, inflation, and interest rates, affect the Nikkei 225.
The Nikkei 225 is priced in the Japanese yen, so changes in the yen's value can affect the index. For example, for businesses that receive a significant portion of their revenue in foreign currencies, a stronger yen can cause stock prices to decline, while a weaker yen can cause stock prices to rise.
Trade agreements and geopolitical developments
Geopolitical developments and trade policies that affect Japan's economy and international relations also impact the Nikkei 225.