World indices: what are they?

Probably, everyone at least once in his life heard about world indices. What are they? What are they used for? How are world indices considered? These and other questions will be answered in the framework of this article.

general information

First, let's look at what the world indices are. This is how the indicators of the price change of a certain group of securities are called. On what grounds do they unite? Drawing an analogy, we can say about the portfolio of shares, which are united by one characteristic (owner, industry, and so on). When a certain index is being compiled (or it is being studied), then the most important is from which securities it was formed. Due to this, the set of stocks and bonds that were included in it, you can conduct a study of the situation on the market. Information can relate to a certain area, and the whole economy. The dynamics of world indices allows us to judge development in general, since it takes into account a whole set of enterprises, which, as a rule, are very loosely related (or there are no mutual relations between them).

What types of these indicators exist? Indices can be classified by calculation method, family and author. Each type will be considered separately.

The oldest indicators

Initially, let's touch on the days gone by. The first widespread index was created by Charles Doe in the distant year 1884. It was calculated on the basis of quotations of the 11 largest transport companies that were represented on the US stock exchange. In 1896, he was re-profiled and began to reflect the state of affairs is simply the largest industrial enterprises of the United States of America.

The S & P 500 index is quite famous, which pays attention to the half a thousand of the largest companies in the US in general. It was created in 1923, but the modern version appeared in 1957. These two, thanks to the high accuracy of the processed data, are recognized for the world's major indices, although they are primarily aimed at the United States. Why is that? The fact is that the largest number of the largest companies in percentage terms is located in the United States. And the huge influence of this state on the entire planet and encourages many to see the Dow and the S & P 500 as the main world stock indexes that show emerging trends.

What are they needed for?

If we consider the general case, then the world indices are indicators, due to which investors can characterize for themselves the speed and general direction of movement of companies in a particular industry or the entire economy. Given these data, decisions are made about where to invest. Also, changes can inform about the impact of certain events.

Let's look at a small example. Suppose that there is an increase in oil prices. What will happen in the exchange then? The cost of companies that produce oil will also grow. This, of course, is a very simple and primitive example, but it gives an understanding of what things are allowed to judge indices. Earlier it was said about the types of indexes. Let's return to them again.

Calculation methods

One of the oldest provides a search for the average arithmetic. If we talk about the world stock indices that used this approach, then we should mention Dow Jones. It was calculated at weighted average share prices. But over time, the imperfections of this method became obvious. The most significant thing about itself was that the companies issued different numbers of shares. As a result, the real state of affairs was significantly distorted. True, there are pluses here, because such indices are distinguished by the simplicity of calculation and the speed of reaction to fluctuations in the price of stocks and bonds. As a result - when the crisis comes about it is learned very quickly.

An alternative to this approach is the use of the arithmetic mean of the weighted mean. One example is the Value Line Composite Aithmetic Index. In this case, the price of each stock is multiplied by a certain coefficient, corresponding to its share in the total value of the index.

The last approach that is highlighted is the search for the mean geometric value. An example is the FT 30.

Families and producers of indexes

This concept is introduced for indicators that are calculated by one organization. As an example, we can recall the rating agency Standard & Poor's, which estimates not only the 500 largest companies, but even the country. There are also separate families of individual exchanges (NASDAQ, MICEX, RTS, DAX 100 Sector Indexes and many others). With respect to producers, we can say that they can be again agency, when the relevant organization is engaged in their compilation. They are also formed by separate exchanges.

Conclusion

World indices are an important tool for investment activities of a large number of people and organizations. If we talk about the situation of the Russian Federation, then there are two distinctive features:

1. Russia is not yet a country in which key players of a global scale are located.
2. Due to the policy of sanctions from the European Union and the United States, there has been a trend according to which rating agencies and exchanges are starting to create new indicators that do not include the state of affairs in the Russian Federation. Officially, this is aimed at protecting investors from the influence of the country, which is in partial international isolation, and investments in risky assets.

World indices can come in handy even for those people who are only planning to collect their investment portfolio in order to have more opportunities for a free life in the future.