CISI – Financial Products, Markets & Services Topic – Equities (4.1.9 and 4.1.10) Stock Exchange Indices

Learning Objectives Know the types and uses of a stock exchange index Know to which markets the main indices relate to

Stock Market Indices The media refer to stock market indices daily, reporting on movements in the FTSE, Dow Jones and others. You have come across indices before which are used to measure different things: e.g. Retail Price Index (RPI) and Consumer Price Index (CPI) both measure inflation

Much Higher Numbers – reflects a number of points, not share price Share Indices Sell Double top ‘M’ Much Higher Numbers – reflects a number of points, not share price Buy Sell Double bottom ‘W’ Buy Sell The line is not as erratic in its movements compared with the share price charts – it provides a snapshot of overall share price movements in the FTSE 100 companies Buy

Stock Market Indices Benefits of share indices The FTSE 100 is an example of a stock index. Stock indices do the following: Provide a snapshot of how share prices are performing in a particular stock market, or across several markets. Measure price movements in markets across a number of different types of stocks. Calculate the aggregate price movement of its targeted stocks on a daily basis, Provide a single figure for ease of comparison. Benefits of share indices Allows investors to gauge the overall performance of the market (not easy to do by looking at individual share prices) A stock index will smooth out anomalies and provide a consistent picture of the mood across the market. Provide a benchmark for investors - assess whether their portfolios of shares are doing better (outperforming) or worse (underperforming) than the market in general.

Stock Market Indices – Measurements A selection of shares from several stock markets around the world A selection of shares from a single stock market e.g. Shares classified according to size (market capitalisation) Measures price movements across All shares listed on a single stock market. Stock Market Indices Mid cap companies (market capitalisation value of between $2 billion to $10 billion) Small cap companies (market capitalisation value of between $250 million–$2 billion) Large cap companies (market capitalisation value of more than $10 billion) Provide a snapshot of how share prices are performing in a particular stock market, or across several markets Pharmaceuticals Utilities Industrials ‘Green’ stocks (following sustainable and environmentally friendly policies) ‘Sin free’ stocks (Avoiding earnings from alcohol, tobacco, gambling and weapons)

all reviewed every 3 months. Stock Market Indices - UK FTSE 100 FTSE 250 FTSE 350 FTSE All Share AKA the ‘Footsie’ Index of the largest 100 UK companies Covers about 70% of the UK market value Index of the next 250 medium sized (mid cap) companies below the 100. Combination of the FTSE 100 and FTSE 250 indices. The 350 is broken down into industry sectors e.g. retailing and transport Covers over 800 companies. Includes FTSE 350 Accounts for 98% of the UK market value. Used as a benchmark against which diversified share portfolios are assessed. all reviewed every 3 months. Companies with a share price growing strongly and a significantly increasing market capitalisation replace those whose share price and market capitalisation is static or falling

Dow Jones Industrial Average Stock Market Indices - World World Indices Japan France USA Dow Jones Industrial Average (DJIA or ‘The Dow’) A narrow view of the US stock market 30 stocks S&P 500 A wider view of the US stock market 500 stocks Nasdaq Composite Focuses on shares traded on the Nasdaq Includes many technology companies 3000+ stocks Germany Xetra DAX Hong Kong China 30 Stocks Hang Seng 225 Stocks 40 Stocks 58 Stocks