Key takeaways
- An index measures a defined group of shares using a published method.
- Market-cap weighting and price weighting can produce very different results.
- Indices are traded through funds, futures and CFDs, and act as a gauge of risk appetite.
The main indices
| Index | Country | Members | Weighting |
|---|---|---|---|
| S&P 500 | US | About 500 large companies | Float-adjusted market cap |
| Dow Jones Industrial Average | US | 30 | Price |
| Nasdaq-100 | US | About 100 of the largest non-financial Nasdaq companies | Modified market cap |
| FTSE 100 | UK | 100 | Free-float market cap |
| DAX | Germany | 40 | Free-float market cap; total return index |
| Nikkei 225 | Japan | 225 | Price (adjusted) |
Why weighting matters
In a market-cap index, a company worth ten times more has ten times the influence, so a handful of very large firms can drive the whole index. In a price-weighted index such as the Dow, a share trading at $400 moves the index more than one at $40, regardless of company size.
Price vs total return
Most quoted index levels are price indices, excluding dividends. The DAX is an exception: its headline level assumes dividends are reinvested. Comparing the DAX with the FTSE 100 without adjusting for this is misleading.
How indices are traded
- Index funds and ETFs for investors.
- Futures on exchanges such as CME and Eurex, trading nearly around the clock.
- CFDs offered by brokers, with UK/EU retail leverage capped at 20:1 on major indices.
Why FX traders watch indices
Falling indices often signal rising risk aversion, when the yen, Swiss franc and US dollar tend to strengthen and currencies such as AUD and NZD weaken. The Nikkei 225 is also sensitive to the yen: a weaker yen can lift exporters' profits in yen terms.
Check exchange hours on the board and continue with the stock market guide.
Nasdaq 100, FTSE 100 and S&P 500 at a glance
The Nasdaq 100 tracks about 100 of the largest non-financial companies listed on Nasdaq; the FTSE 100 tracks the 100 largest companies on the London Stock Exchange; the S & P 500 tracks about 500 large US companies across all sectors. All three are weighted by company size, so their largest members move them most.
Common questions
Can you buy an index directly?
No. An index is a measurement. Investors buy funds or derivatives that track it.
Why is the Dow still followed if it has only 30 companies?
It has a long history and is widely quoted, though many professionals prefer broader indices such as the S&P 500.
Sources
- S&P Dow Jones Indices
- Nasdaq index methodology
- FTSE Russell
- STOXX (DAX)
- Nikkei Inc.