What Are Indices?
Equity market indices were invested at the end of the 19th century in order to get a general idea of how share prices were performing overall. The first index to be created was by one Charles Dow in 1896, the beginnings of the Dow Jones index in the US. An index is simply a group of shares whose price movements are observed together because they are considered to be representative of the market as a whole, or of a particular portion of it. An index effectively illustrates how well or badly a particular stock market, or section of it, is doing.
On the London Stock Exchange there are a number of indices, the FTSE 100 (the 'Footsie') and the FTSE All-Share being the two best known. In the US, the key indices are the Dow Jones Industrial Average, the Standard & Poors 500 (S&P 500), the New York Stock Exchange (NYSE) and the Nasdaq. Key European indices are the CAC 30 (French index) and the DAX 40 (German Index) and many people are familiar with some of the key Asian indices such as the Nikkei (Japan), Hang Seng (Hong Kong) and SGX (Singapore).
Most indices are 'weighted', meaning that the bigger companies make up proportionately more of the index, and therefore have a greater effect on its movements, than the smaller companies. So the movement of an index will be in line with the fortunes of the country's largest companies, and would be expected to reflect the effects of macroeconomic factors as well as market sentiment.
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