Key Stock Indices and Investment: What Investors Need to Know

Every morning and evening, when economic news is broadcast, you might hear names like Dow Jones, NASDAQ 100, Nikkei 225, or Thailand’s SET. If you wonder what is a stock index and why it is important to investors, this article will provide comprehensive answers.

What is a stock index and why is it important

A stock (Stock Index) is a number that indicates the movement of stock prices in the market. It consists of a selected group of stocks. For example, the SET High Dividend 30 index reflects the prices of 30 leading companies with high market value, excellent liquidity, and high dividend payouts.

The key principle of a good stock index is that it can be invested in practically and is transparent in its formation. Many mutual funds use various stock indices as benchmarks, such as SET50 and SET100, which are called index funds. The difference between a fund’s performance and its benchmark index is called Tracking Error. The lower this value, the more accurately the fund can mimic the stock index.

How different stock indices are calculated

There are three main methods for calculating stock indices, and the choice of method affects the movement of the index figures.

Market Capitalization-weighted (

In this method, larger stocks with higher Market Cap )market value( have more influence on the stock index. Examples include S&P 500 )U.S.(, FTSE 100 )UK(, and SET )Thailand(.

Suppose Index G has Stock A priced at 4 baht with 100 shares, and Stock B priced at 5 baht with 200 shares:

• Market Cap of Stock A = 4 × 100 = 400
• Market Cap of Stock B = 5 × 200 = 1,000
• Total Market Cap = 1,400

Proportion in the index:

• Stock A = )400 ÷ 1,400( × 100 = 28.57%
• Stock B = )1,000 ÷ 1,400( × 100 = 71.43%

Stock B has a higher weight in the index because its market value is larger.

) Price-weighted ###

This method assigns more weight to stocks with higher prices, regardless of the number of shares outstanding. Dow Jones and Nikkei 225 use this method.

Example: Index G has Stock A (5 baht), Stock B (10 baht), and Stock C (15 baht):

• Stock A = [5 ÷ (5+10+15)] × 100 = 16.67%
• Stock B = [10 ÷ (5+10+15)] × 100 = 33.33%
• Stock C = [15 ÷ (5+10+15)] × 100 = 50.00%

Stock C has the most influence even if the number of shares is the same.

( Equal-weighted )

This method assigns equal proportions to all stocks, which helps diversify risk better but may change more rapidly.

Leading stock indices in Thailand

Besides the SET index that reflects the entire stock market, there are other popular indices used as references.

SET50 and SET100 are stock indices that show the price levels of 50 and 100 leading companies by market value, with continuous high liquidity trading and a proportion of retail shareholders meeting set criteria.

The base date for SET50 is August 16, 1995, and for SET100 is April 30, 2005. Both indices start at 1,000 points. The list of companies in the indices is updated every 6 months in June and December.

Globally renowned stock indices

S&P 500 (U.S.)

S&P 500 is a stock index weighted by market value, reflecting the performance of 500 large companies listed on the U.S. stock exchanges. It is one of the most traded stock indices and a key indicator of the American economy. Companies in the S&P 500 include Apple, Microsoft, Amazon, Berkshire Hathaway, Visa, and others.

Dow Jones Industrial Index (U.S.)

Dow Jones is a stock index weighted by price, consisting of 30 large companies listed on the U.S. stock exchange, such as Microsoft, Coca-Cola, Apple, and McDonald’s. It is compiled by S&P Dow Jones Indices.

NASDAQ 100 (U.S.)

NASDAQ 100 ###NDX( was first created on January 31, 1985. It includes 100 large non-financial companies listed on the NASDAQ market, ranked by market value. NASDAQ 100 is home to four companies with revenues exceeding one trillion dollars: Apple )AAPL(, Amazon )AMZN(, Microsoft )MSFT(, and Alphabet )GOOG, GOOGL(.

) Nikkei 225 (Japan)

Nikkei 225 is a stock index that measures the performance of 225 leading Japanese companies listed on the Tokyo Stock Exchange. Since September 7, 1950, over 70 years ago, Nikkei 225 has been regarded as an important indicator of Japan’s post-World War II economic condition.

FTSE 100 (UK)

FTSE 100 is a stock index of the 100 companies listed on the London Stock Exchange with the highest market value. Companies in this index cover 81% of the total market value of the London Stock Exchange, making it a key measure of the UK stock market. It is compiled by FTSE Group, a subsidiary of the London Stock Exchange. Examples include Tesco, Unilever, and Barclays.

DAX 30 (Germany)

DAX 30 is a stock index weighted by market value of the top 30 German companies listed on the Frankfurt Stock Exchange. Similar to the Dow Jones in the U.S., but because it includes fewer companies, DAX 30 may not fully reflect Germany’s economy. It was first published on July 1, 1988. Examples include BMW, Adidas, Bayer, and Deutsche Bank.