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share index can be defined as the average price of a large group of stocks; they can be either the average of the stocks of a particular stock exchange or stocks of an entire investment sector. Only those shares that have something in common can be used to calculate an index. These groups of stocks can be from the same industry or they may have the same company size or location. The share indices indicate the financial status of a particular exchange or industry.
The ways of calculating share index are as follows:
Market Value Weighted Index:
This takes into account the size of the companies taken into consideration. The price shifts experienced by small companies are less influential than those of larger companies.
Price Weighted Index:
This index is calculated irrespective of the size of the companies in consideration or the value any particular stock.
Market Share Weighted Index:
This takes into consideration the number of shares rather than their total value.
These share indexes also act as investment instruments. The mutual funds that are based on an index are in the habit of duplicating the holdings of the underlying index. These index funds have lower costs and they are better than managed funds.
In this context, the Dow Jones Industrial Average needs to be mentioned. It is one of the best industrial averages in the world. It is a price-weighted average index consisting of the stocks of the top thirty companies of America. A larger picture of the US economy can be obtained from the Standard & Poor 500 Index which bases its calculations on 500 United States corporations. In London, there is another major influential index. It is the FTSE 100 Index. It bases its calculations on the 100 largest companies of the London Stock Exchange.
A few variations exist in share indexes. The Ethical Stock Market Index includes only those companies which pertain to some social or ecological criteria. Environmental Stock Market Index gives a quantitative measure of the environmental damage caused by companies.
A stock market index lists stocks and statistically reveals the composite value of its components. They act as reflectors of the economic value and performance of companies.