Hot Topic: Trading the major indices - what you need to know
Market Analysis - | 09 Sep 2019
As we noted in our previous article - an introduction to index trading - there are thousands of different indices which are constantly being calculated and updated. In this article, we’re going to take a look at some of the most common equity indices on offer, how to trade them and what might be driving their price action.
Related Index: Dow Jones Industrial Average
Number of Stocks: 30
Typical Components: Boeing, Microsoft, Caterpillar, Apple
Total Value of Index: $7,278,000 million (31/3/19)
This index is made up of a selection of thirty of the largest US-listed industrial stocks. The components are all traded on either the NYSE or NASDAQ and the index value is seen as providing an insight regarding the fortunes of the American industrial sector.
The DOW is slightly unusual in its composition, in that it is price weighted rather than the more usual market weighting which is used by most indices today. That means those shares trading at an absolute larger price take a greater weighting in the index. Boeing’s share price of $350 carries around twice as much weight in the index as 3M’s $177 share price.
Related Index: FTSE-100
Number of Stocks: 100
Typical Components: Royal Dutch Shell, Vodafone, HSBC, BAE Systems
Total Value of Index: £2,043,000 million (26/7/19)
This index is made up of the 100 largest London-listed stocks, subject to some limited qualification requirements. The constituents are updated quarterly and it is a market-cap weighted index. That means behemoth Royal Dutch Shell’s £213 billion valuation carries more than 10 times the clout of tobacco giant Imperial Brands, with a market cap of ‘only’ £20 billion.
Recent estimates suggest that 75% of all earnings for the FTSE-100 companies come from overseas, which means the index can be heavily directed by foreign exchange movements. A falling Pound means that repatriated foreign currency profits are worth more when converted back into Sterling. This bolsters the share price, even though overseas investors may see no real benefit as Sterling to them is now worth less. However, this pushes up the valuation of the FTSE-100. Conversely, a rising Pound has the potential to weigh on the FTSE, again by virtue of those overseas profits looking less appealing.
Related Index: DAX Performance Index
Number of Stocks: 30
Typical Components: Adidas, Lufthansa, SAP, Volkswagen
Total Value of Index: EUR1,091,000 million (30/7/19)
As the name suggests, this is an index of the 30 largest Frankfurt listed companies, calculated on a market-cap weighted basis. Curiously unlike London’s FTSE-100, the rules stipulate that each constituent must represent the German economy, either by being headquartered there or creating a significant proportion of its profits in the country. Another key difference when compared to London is that the underlying index is calculated by incorporating the value of reinvested dividend payments. This is an important point to remember, especially if looking at the relative performance of the GER30 against another equity index.
As with most indices, shares have an inverse correlation to government bond prices as investors look to balance risk and return. The extended bout of negative interest rates in Europe has been driving money from debt into equities. If further monetary policy easing is seen from the European Central Bank then it would be rational to expect the German index to rise further as investors continue to shun bonds which yield returns which are significantly lower than inflation.
Related Index: S&P ASX 200
Number of Stocks: around 200
Typical Components: Commonwealth Bank of Australia, BHP Group, Telstra, Woolworths
Total Value of Index: AUD1,900,000 million (30/7/19)
Although mining may be considered by many as the dominant sector in the Australian economy, it is financial services firms which exert the most influence over the ASX index, accounting for more than 30% of the total market capitalisation. Again, the index is market cap weighted but comes with a divisor, which is a variable to ensure that it is changes in the share price rather than the issue of new stock which influences the market’s value.
However, add together the valuation of mining companies and the banks, and they account for around half of the index. This dominance has raised some concerns in the past as a sharp decline in mineral prices risks driving unemployment and leaving banks will bad loans as a result. This lack of diversification has the potential to drive greater volatility as a result.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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