The stock index is an indicator of the dynamical state of the security market. By comparing the current index value to its previous values it is possible to estimate the market behavior, its reaction to changes in the macroeconomic situation and corporate events (mergers, acquisitions, etc.).

The stock index is calculated on the basis of prices for a certain group of securities (index basket). The initial value of the index may be the sum of the prices or equated to an arbitrary number (for example 1000). The prices are often multiplied by the special coefficients. The more important factor is the index change with time than its absolute value.

Depending on the index basket components, the index can characterize the market as a whole, the market of a certain kind of securities, industry market (for example, telecommunications, transport, etc.). Comparing the dynamics of various indices, we can comparably estimate the development of various economic sectors. Stock indices are more often calculated and published by information or rating agencies and stock exchanges. The name of the index is often a number of securities included in the index (for instance, S&P 500, FTSE 100).

Stock indices are also the derivative basis for futures and options, which are used for investment and speculative purposes, as well as for the risk hedge. The index value is interpreted as the price of this instrument.

There are several methods for calculating the indices, the main of them are methods of weighing the price and weighting by capitalization. The index weighted by the price (price weighted) is the sum of all the assets included in the index, divided by a coefficient (for example, the Dow Jones). The Index weighted by the market capitalization (market cap/float weighted) is calculated as total market capitalization of all assets included in the index, divided by a coefficient (for example, S&P 500). Most of modern stock indexes are weighted by market capitalization free. The company’s capitalization is the total value of securities issued by the company, calculated at the market price. The calculation parameters may change over time, due to corporate events of individual companies, and can also cause changes in the security list containing the companies included in the index.

The very first stock index was developed in 1884 in the United States — Charles Dow began to count the average change in market prices for 11 major industrial companies. Since 1928, the Dow Jones was calculated for 30 companies.

The most popular assets in the world are the stocks of companies traded on the U.S. exchanges (DJI, S&P 500, NADSAQ 100) and European (DAX, CAC 40, FTSE 100) and the Japanese stock index called NIKKEI 225. Besides the main index, each of these indexes has an index family differing by composition, economic sector, and other parameters.

DAX Index — DAX futures