Stock Index

STOCK INDICES TRADING

OVERVIEW

What is Index?

A stock index is a measurement of the price performance of a group of shares from a particular exchange.

Example

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The PSEI represents 30 stocks trading on the Philippine Stock Exchange. If those stocks increase in price, the PSEI goes up. If those stocks decrease in price, the PSEI goes down.

You can imagine one stock as one piece of fruit. In that case, stock index would be the bowl of different kinds of fruit.

HOW ARE STOCK INDICES CALCULATED?

Stock indices are typically calculated in one of two ways.

The majority of global indices are capitalisation-weighted, which means that a company with a higher market cap (or total value on the market) has a greater impact on its index’s price.

However, some major indices – like the Dow Jones and Nikkei 225 – are price-weighted, which means that a company with a higher share price affects the index’s price more. In a price-weighted index, for example, a company with a share price of $100 will have ten times the influence of a company with a share price of $10.