Stock index – a composite index calculated on the basis of prices of a certain group of securities – "index basket".

When calculating the index, its initial (base) value can be the sum of prices or equated to an arbitrary number (for example, 100 or 1000). Prices are often multiplied by additional factors to ensure comparability. Therefore, the absolute values of the indices are not important. Changes in the index over time are important, which allows us to judge the general direction of price movements in the index basket, despite the fact that stock prices within the "index basket" may change in different directions. Depending on the principle underlying the selection of securities for the index, it can reflect the price dynamics of a group of securities united by some feature (e.g. high, medium, small capitalization of shares) of a selected market sector (e.g. telecommunications), or the broad stock market as a whole.

A stock index is not a single security, so it is common to talk about the "value" or "level" of an index, but not the "price." At the same time, stock indices are often the basis for derivative financial instruments of the same name (index futures or options), which are used for investment and speculative purposes or to hedge risks. In this case, the index value is interpreted as the price of this instrument.

Mutual funds or exchange traded funds often use indices as a benchmark (copy reference).

According to Dow Jones & Co. Inc., there were 2,315 stock indices in the world at the end of 2003.

At the end of the name of stock indices may be a number representing the number of joint-stock companies on the basis of which the index is calculated: CAC 40, Nikkei 225, S&P 500.

History of stock indices

The first stock index was developed on July 3, 1884 in the United States by Charles Dow, a journalist of the Wall Street Journal newspaper, a famous financier, founder of Dow Jones & Company. The Dow Jones Transportation Average index was calculated for the 11 largest transportation companies in the United States. It currently includes 20 trucking companies. However, the most famous is the Dow Jones Industrial Average (DJIA), calculated on the 30 largest companies in the industry since 1928.

Stock index trading

A stock index futures is a contract to buy or sell the par value of an index at some point in the future. In the USA there are futures on several stock indices: S&P 500 (CME), NYSE Composite (NYFE), MMI (Chicago CBOT 1 exchange).

Trading in stock index futures contracts began in the early 1980s. For individual investors, index futures have become a way to trade on expectations of future general stock market movements. Institutional investors began using index futures to hedge portfolios and allocate assets.

The U.S. stock market includes the two largest exchanges in the world, the New York Stock Exchange and NASDAQ.

NYSE

NYSE (New York Stock Exchange) is the world's largest stock exchange by capitalization (27 trln USD) and the oldest in the United States, located on the famous Wall Street.

The site is often referred to as the Big Board. The name goes back to the days when stock quotations and trading activity were updated manually on a large board for traders and brokers from trading pits.

The NYSE today is mainly represented by the "heavyweights" of the American economy, such as Exxon Mobil, Chevron, Johnson & Johnson, Walmart, Procter & Gamble, Berkshire Hathaway, and JPMorgan Chase. As a rule, these are value stocks.

NASDAQ

NASDAQ (National Association of Securities Dealers Automated Quotations Stock Market) – since 2006 has had the status of an American stock exchange, which is also based in New York. It ranks second on the list of stock exchanges in terms of market capitalization of traded shares (22 trln USD), second only to the NYSE. Initially, the NASDAQ exchange functioned as the world's first electronic quotation platform, and later the exchange took over the lion's share of all OTC transactions.

As of today, NASDAQ is considered to specialize in high-tech companies such as Apple, Microsoft, Alphabet/Google, Amazon, Meta Platforms/Facebook and is one of the leading players in initial public offerings (IPOs). So we're talking mostly about growth shares.

China Stock Market

The third largest exchange in the world by capitalization (8 trln USD) after the American NYSE and NASDAQ, the Shanghai Stock Exchange (SSE), is the largest trading floor in mainland China. The Shanghai Stock Exchange is unique in that it offers, among other things, shares of China's heavy industry companies.

Such well-known giants as ICBC, PetroChina, Sinopec, China Shenhua, SAIC Motor, Beijing-Shanghai High Speed Railway are traded on the Shanghai Stock Exchange. As of 2019, SSE has added a STAR Market division focused on high-tech stocks (analogous to NASDAQ).

The Shanghai Stock Exchange SSE Composite Index is the third largest stock index in the world after the S&P 500 and NASDAQ Composite and tracks more than 1,000 companies traded on the exchange.