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Mount Nico Corp Limited does not issue advice, recommendations or opinions in relation to acquiring, holding or disposing of any financial product. Mount Nico Corp Limited is not a financial adviser and all services are provided on an execution only basis.

Indices

What is an index?

An index is a collection of assets, typically stocks/shares, that are meant to mimic the performance of a particular market sector, industry, commodity, or anything else investors might want to track. Indices can be broad, like an S&P 500 index, or they can be narrow, like a Dow Industrials index. The benefit of an index is that it allows investors to gain exposure to a broad group of assets without the need to buy all the individual assets separately. In addition to stocks there are also indices for bonds, commodities, and currencies.

Popular indices

There are many different global indices tracking stock market action. In fact, nearly every nation has at least one index, tracking the broad performance of its stock market(s). However, some of these indices are definitely more popular than others. For example, in the U.S. there are a number of popular indices that are followed closely by traders. These include the Nasdaq 100, which is a proxy for the technology sector, the Dow Industrials, which tracks 30 of the largest blue-chip companies in the U.S., and the S&P 500, which is a broad measure of the U.S. markets.

In Europe there are also a number of popular indices. This includes the FTSE 100 and the FTSE 250 in the U.K. The former is more internationally focus and contains primarily multi-national companies, while the latter is more focused on the domestic U.K. economy. Outside the U.K. other popular indices include the CAC 40 in France and the DAX 30 in Germany.

Asia also has a number of popular indices which include the Nikkei 225 in Japan, the S&P/ASX 200 in Australia, Hong Kong’s Hang Seng Index, and the Shanghai Composite in China.

Benchmark Indices

A benchmark index is an index that serves as a standard by which the broader market or even other indices are judged. In investing, nearly all benchmarks are indices, although not all indices are benchmarks. Deciding which index is a proper benchmark, can be a heated discussion amongst investing professionals such as fund managers. Broadly speaking, a benchmark is an index that serves as the measurement yardstick for a portfolio by comparing portfolio characteristics such as returns, risk, component weights and exposure to sectors, styles and other factors to the benchmark.

What moves Indices?

The value of an index will change based on the price movements of the individual shares used in the creation of that index. So, the factors that move indices are effectively the same as those that cause movements in individual equities, bonds, or commodities. The difference is that while certain events can have a large impact on individual companies, these same events will have only a minor impact on a broad-based index.

However, an economic or political event that is relevant to an entire industry or sector can have a large impact on any index used to measure that particular sector. For example, the S&P 500 Energy Index specifically tracks the energy sector. Any news that causes the price of oil to rise or fall dramatically will almost certainly have a large impact on the S&P 500 Energy Sector Index as well.

Benefits and Risks

The primary benefit of indices is that they provide an easy way to track the performance of the broad stock market, or of individual sectors and industries within the economy. They can provide a guide to the health of the overall stock market of any country. Plus, historical data can give investors an indication of how markets have reacted in the past to similar situations that might be occurring now. Interestingly, research has shown that index funds and ETFs outperform actively managed portfolios over time.

One disadvantage of indices is based on how they are calculated. For example, the Dow Industrials is a price weighted index, which means higher priced stocks will have a greater impact on the value of the index. Another disadvantage of some indices, which also applies to the Dow Industrials, is that they are too narrow or don’t contain a large enough cross-section of equities. Another method for calculating an index is by market capitalization, but that means the index is more influenced by companies with a large market capitalization, which might not truly reflect the market.

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