In the world of finance, an index is a measure and it is often used in reference to a statistical measure of change on several financial platforms. When it comes to stock, financial markets and bond markets, indices are made up of securities that stand for a specific market or part of it. Direct investment in an index is not possible. In the United States, the US Aggregate Bond Index and the S&P 500 are the most well-known benchmarks for the bond and stock markets.
Calculation of Indices
For every index that is linked to the stock and bond markets, there are specific ways to calculate each one. The predominant thing is that the comparative change of an index is seen as more relevant than the real numeric value of the index. An example is the Financial Times Stock Exchange (FTSE) 100 where if the value is at 7,780.30, it means that the index is almost eight times the base level which stands at 1,000. But you also need to take into consideration records of the day before and work that into the calculation as well.
Explaining Mutual Funds, Trading Indices, and Exchange-Traded Funds
When it comes to exchange-traded funds (also called ETFs) and mutual funds, it is common to see stakeholders try to fashion them along the line of a particular index. The purpose behind this is to ensure the investor can purchase security which gains or depreciates at the same rate as the stock market or a particular sector of the market.
Indices are also useful with it comes to assessing the performance of ETFs and mutual funds. In doing this, the investors and other stakeholders are able to have a very good understanding of how their investments are faring.
Examples of Trading Indices
Of all the indices used all over the world, the most revered of them all is Standard & Poor’s 500. It is often used as a standard on the stock market. An overwhelming fraction of all the stocks traded in the United States is connected to it.
On the other hand, if you are to compare the Dow Jones Industrial Average (DJIA), another dominant index, it has just 30 stock values listed on it. Other well-known indices are the Wilshire 5000, NASDAQ, the MSCI EAFE which covers markets in Japan, South Korea, Australia, New Zealand and various parts of Europe. Then there is also the Lehman Brothers Aggregate Bond Index which now has a new name. It is called the Barclays Capital Aggregate Bond Index.
Explaining Indexed Annuity
Just as it is with the mutual funds, indexed annuities are also linked to a trading index. But, there is a distinction. Instead of the stakeholder working on getting an investment portfolio patterned after the concerned index, these securities have a return on investment that adhere to a specific index but they often have limits.
Indices or Indexes?
Some people get confused about whether they are to make use of indices or indexes as terms. However, the good thing here is that both terms are correct and they are simply the plural forms of ‘index’. The reason many find this confusing is because ‘index’ is one of the very special words in English that have two different plurals. So, both plurals are correct even though when indices are referred to, it is usually concerning to mathematics, statistics or even the physical sciences.
To clarify once again, an index is a reference to numbers, figures and symbols comparing values to an established standard. In the financial sector, it is often common to see both plurals used interchangeably. However, of late, it is becoming the practice to make more use of ‘indices’. This is particularly true when the topic of discussion has to do with stock and other financial concepts.
If you have understood the points put up above, you are good to go with begining your career as indices trader!