Stock market indices are among the fundamental tools in financial markets that help investors examine the overall condition of the market and its fluctuations. These indices not only serve as benchmarks for evaluating the performance of various market sectors but also play a crucial role in formulating investment strategies.
In the stock market, shares of many companies are traded. A stock market index functions as a gauge of the overall market condition and essentially represents an average of the prices of all shares in a given market. Simply put, an increase in the stock market index indicates a rise in the average price of shares in the market. There are different methods for calculating a stock market index. In the past, the Tehran Stock Exchange index was calculated based on a weighted average. In this method, the price of each share was multiplied by that company’s share of the total market.
In general, the current stock index in the Tehran Stock Exchange is a type of weighted return index. In this calculation model, even if the share prices of some companies decrease, the overall weighted average of the index may still decline if smaller companies show a positive trend. The reason for this is that larger companies have a greater weight in the index calculation, and their price changes have a more significant impact on the index.
A stock market index is essentially a number that measures price fluctuations in the stock market and shows us whether share prices are increasing or decreasing. In the stock market, there are various indices, each calculated using specific formulas, but their common purpose is to measure the overall condition of the market. These indices help investors analyze the general market trend and price changes, enabling them to make better decisions regarding the buying and selling of shares.
Total Index Value = (Current Market Value of Stocks at Time of Calculation / Current Market Value of Stocks at Base Time) × 100
The overall stock index and other indices can be viewed on the main page of the TSETMC website. Additionally, through your brokerage's online trading system, you can access both the numerical value and the chart of the overall index.
Globally, there are numerous indices, each designed for specific purposes. These indices allow investors and analysts to examine and compare the performance of various markets. Below are several well known global indices:
1) S&P 500
This is one of the most reputable stock indices in the United States, tracking the performance of 500 large American companies. The companies in this index are weighted based on market capitalization. The S&P 500 is recognized as a benchmark for assessing the overall condition of the U.S. economy, and many investment funds follow this index.
2) Dow Jones Industrial Average
This is one of the oldest and most well known stock indices in the world, representing the performance of 30 large and stable U.S. companies. The Dow Jones is a price weighted index, meaning that companies with higher stock prices have a greater impact on the index. It is often cited in financial news as a representative of the U.S. stock market.
3) Nasdaq Composite
The Nasdaq index includes over 3,000 companies, primarily active in the technology sector and related industries. Due to its focus on tech driven companies, this index is recognized as a benchmark for assessing the state of the technology industry. Some of the world’s largest companies, such as Apple, Microsoft, and Amazon, are included in this index.
4) Nikkei 225
This index represents the Japanese stock market and includes 225 large Japanese companies. The Nikkei is also a price weighted index, where stock price changes directly affect the index value.
5) Regional and National Indices
In addition to global indices, many countries and geographic regions have their own specific indices. For example, the FTSE 100 index in the United Kingdom reflects the performance of the 100 largest listed companies in that country, while the DAX index represents the performance of the German stock market. These indices help local and international investors understand the economic and financial status of a specific country or region.
6) Specialized Indices
There are indices dedicated to specific industries or groups of companies. For example, the Nasdaq 100 focuses solely on the 100 largest technology companies. Similarly, indices such as the Energy Index or Financial Index reflect the performance of particular sectors of the economy.
7) Global and Multinational Indices
Some indices track the performance of multinational companies on a global scale. For instance, the MSCI World Index includes a collection of companies from various countries and provides an overall view of the global economy.
Stock market indices are vital tools for analyzing financial markets. They help investors understand overall market trends or specific segments without needing to examine each individual stock. Different index calculation methods such as market capitalization weighted, price weighted, and equal weighted each offer a unique perspective on market performance. Global indices like the S&P 500, Dow Jones, and Nasdaq, along with regional and specialized indices, play a key role in investment decisions and economic analysis.
In many stock markets, there are indices defined based on company size. These indices help investors assess the performance of small, medium, and large companies separately and develop appropriate investment strategies for each group.
Large Cap Companies
Indices that track the performance of large cap companies typically include firms with high market capitalization. These companies are often more stable, have consistent revenues, and carry lower risk. An example of such an index is the S&P 500, which covers 500 large American companies.
Mid Cap Companies
These indices are designed to analyze medium sized companies. Mid cap firms often have more flexibility than large corporations and can experience significant growth. The S&P MidCap 400 is one of the most well known indices in this category.
Small Cap Companies
Small cap indices focus on companies with lower market capitalization. These firms are usually in early growth stages and have high long term growth potential, but they also come with greater risk. The Russell 2000 is one of the most prominent indices that tracks the performance of 2,000 small companies.
Investing based on company size requires different strategies. For instance, risk tolerant investors may gravitate toward small cap companies due to their higher return potential. Conversely, investors seeking greater security may prefer large cap firms.
Using these indices helps investors diversify their portfolios and manage risk more effectively.
Stock indices not only reflect the condition of the stock market but also serve as powerful tools for gauging overall economic health. Index fluctuations often mirror a country’s economic conditions, and analyzing them can provide valuable insights into the current and future state of the economy.
1) Economic Growth or Recession
Stock indices often act as indicators of economic growth or recession. A steady rise in indices reflects investor confidence in the economy and company growth, while a sustained decline can signal an impending economic downturn.
2) General View of Economic Sectors
Specialized indices like the Energy Index or Financial Index reflect the performance of specific sectors of the economy. For example, an increase in the Financial Index may indicate improved credit conditions and increased banking activity.
3) Influence on Economic Policy
Governments and central banks use stock indices as one of the tools to assess economic conditions. For instance, if stock indices consistently fall, policymakers may take actions such as lowering interest rates or introducing stimulus packages to support the economy.
4) Investor Confidence
Stock indices reflect the level of investor confidence in the economy. Rising indices indicate high confidence in the market and economy, whereas declining indices may point to reduced trust and increased concerns.
5) Forecasting Long Term Trends
Analyzing index behavior over long periods can help forecast economic trends. For example, consistent growth in stock indices over an extended period may suggest that the economy is moving toward stability and development.
From specialized indices to those based on company size, stock market indices are essential tools for investors and analysts. These indices not only assist investors in evaluating market performance and forming strategies but also serve as a key benchmark for assessing the health of the economy. By using these indices, investors can manage risk, identify investment opportunities, and operate more effectively in financial markets.
Stock market indices are tools that allow investors to analyze and evaluate the performance of different sectors of the market. Advantages include providing an overview of the market, simplifying the decision making process, and enabling the assessment of investments. Additionally, indices offer a basis for comparing the performance of investment funds or portfolios. However, there are also limitations. Indices may not provide a complete picture of the market, as they often cover only a portion of the available stocks. Furthermore, the weight given to larger companies can create a skewed representation of market performance.
Weighted indices, such as the S&P 500, are calculated based on companies’ market capitalization; that is, companies with higher market value have a greater impact on the index. In contrast, price based indices like the Dow Jones consider only stock prices and do not take into account the number of shares or the market value of a company. Weighted indices, due to their focus on the actual size of companies, provide a more accurate picture of the market, while price based indices are simpler and more suitable for analyzing the price trend of specific stocks.
Index investment funds and ETFs use stock market indices as a model to achieve performance similar to their target market. These types of funds purchase the stocks included in a particular index and track their value changes. This approach reduces management costs and allows investors to achieve market like returns at a lower cost. On the other hand, this relationship has made indices not only tools for market analysis but also guides for investment management.
Stock market indices, by reflecting price changes and stock values, enable investors to predict future market trends. These indices provide a general view of the performance of various economic sectors. For example, a sustained increase in indices like the S&P 500 may indicate economic growth, while a prolonged decline may signal a recession.
Analysts use these indices to identify patterns and turning points in the market. For instance, examining specific sector indices like the Nasdaq for technology or the Dow Jones for large companies can offer insights into the condition of related industries. However, it is important to note that indices are only one tool, and other factors such as economic policies and global conditions must also be considered.
There are several methods for analyzing stock market indices that help investors gain a better understanding of market performance:
Historical analysis:Studying past trends in indices can reveal recurring patterns and assist in forecasting future behavior.
Comparative analysis:Comparing different indices, such as the S&P 500 and the Nasdaq, can show which market sectors are performing better.
Use of ratios:Analyzing ratios such as the price to earnings (P/E) ratio or dividend yield in the companies within the indices can provide valuable information about stock valuation.
Correlation analysis:Some indices may be correlated with macroeconomic variables such as interest rates or oil prices. Studying these relationships can help in analyzing the overall market conditions.
Analyzing indices requires precision and a deep understanding of the variables influencing the market, as external factors can also affect index movements.
Stock market indices, as benchmarks for evaluating market performance, play a key role in investment and economic analysis. The following is an introduction and review of the most important stock market indices in the world:
1) S&P 500 Index
This index tracks the performance of 500 large companies in the United States operating in various industries. The S&P 500 is weighted based on market capitalization, meaning companies with larger market value have a greater impact on the index. It is often used as a representative of the overall U.S. stock market and as a benchmark for evaluating the country’s economy. Sustained growth in this index can be a sign of economic health.
2) Dow Jones Industrial Average (DJIA)
One of the oldest stock market indices, it measures the performance of 30 large and leading companies in the United States. Unlike the S&P 500, this index is price weighted. Due to its long history and coverage of “blue chip” companies, the Dow Jones is recognized as one of the key economic indicators.
3) Nasdaq Composite Index
This index includes more than 3,000 companies active in the technology sector and other industries and is specifically designed to track the performance of tech oriented firms. Rapid growth in this index often indicates rising innovation and advancement in the tech industry. The Nasdaq also covers both small and large companies, with a focus on tech startups.
4) Russell 2000 Index
This index shows the performance of 2,000 small cap companies in the U.S. market and is used as a benchmark for assessing the status of small and mid sized businesses. The Russell 2000 offers investors a view of the performance of lesser known and higher risk sectors of the market.
5) Nikkei 225 Index
The Nikkei 225 is the leading index of the Tokyo Stock Exchange, tracking the performance of 225 major Japanese companies. It reflects the economic condition of Japan and its top corporations. The companies in the Nikkei belong to various industries, from technology to industrial manufacturing.
6) DAX 30 Index
The DAX 30 includes 30 large and active companies listed on the Frankfurt Stock Exchange in Germany. It is recognized as a benchmark for assessing the economic status of the Eurozone and includes companies from the automotive, engineering, and chemical sectors.
7) FTSE 100 Index
This index tracks the performance of the 100 largest companies listed on the London Stock Exchange. The companies in the FTSE 100 make up a major part of the UK's market value and serve as a useful indicator for analyzing the country’s economic status.
8) Shanghai Composite Index (SSE Composite)
This index represents the performance of the entire Shanghai Stock Exchange and includes domestic and foreign companies active in China. Rapid growth in this index is usually considered a sign of China’s economic progress.
9) MSCI World Index
This index evaluates the performance of large and mid sized companies in developed global markets. The MSCI World serves as a benchmark for global investors seeking to assess the performance of different markets at a glance.
These indices are vital tools for market trend analysis, economic assessment, and investment management. Selecting the appropriate index for analysis or investment depends on the investor’s objectives and the target region. Investors should use global indices to diversify their portfolios and reduce risk.
Global indices such as the MSCI World and FTSE All World enable investors to evaluate the performance of various markets in an integrated manner. These indices play an important role in international investment, as they help investors diversify their portfolios and reduce risks associated with geographic concentration.
MSCI World Index:This index includes large and mid sized companies from 23 developed global markets and is considered an important benchmark for global investors.
FTSE All World Index:This index covers over 3,000 companies from both developed and emerging markets, providing an overall view of global markets.
Dow Jones Global Index:It tracks the performance of global markets, including the U.S., Europe, and Asia, and serves as a suitable benchmark for international investors.
S&P Global 100:This index includes large multinational companies with broad presence in international markets.
These indices allow investors to make decisions based on a more comprehensive view of global market performance and benefit from economic growth in different regions.
Stock indices are used in both main types of market analysis: technical analysis and fundamental analysis.
Technical Analysis:
In technical analysis, indices are used to forecast future market trends.
Studying historical index charts helps identify support and resistance levels, upward and downward trends, and price patterns.
For example, a technical analyst may use the Nasdaq index to study the movements of technology stocks.
Fundamental Analysis:
In fundamental analysis, indices are used as a benchmark for evaluating the intrinsic value of stocks.
Comparing ratios such as the P/E (price to earnings) ratio of companies within an index can provide insight into the overall market valuation.
Additionally, index movements may indicate fundamental changes in economic conditions, which a fundamental analyst can use in their evaluation.
These two approaches demonstrate that indices are multipurpose tools, valuable for both methods of market analysis.
Stock market indices are tools that reflect the overall status of the capital market and monitor changes in stock prices and values. In Iran, there are also various indices used to analyze different segments of the market. The most important of these indices are introduced below:
This index is considered the main benchmark of Iran’s capital market and provides a general view of market performance. The overall index calculates changes in stock prices along with dividends paid by companies and serves as a benchmark for measuring the overall return on investment in the market.
The overall index is often cited in news as an indicator of the market’s general condition and is used by investors to evaluate market trends. This index gives more weight to larger companies, as their market value is higher.
Unlike the overall index, in this index all companies have an equal impact in the calculations. That means price changes in small and large companies are reflected equally. This feature allows the equal weighted index to provide a more accurate picture of overall market performance, especially when large companies experience sharp fluctuations.
This index considers only stock price changes and does not include dividends paid by companies. Therefore, the price index offers only a view of general stock price movements, and for more accurate analysis, it should be used in conjunction with other indices.
This index is similar to the price index but gives equal weight to all companies regardless of their size or market value. This feature helps with more precise analysis of general market trends and the impact of fluctuations in smaller companies.
This index focuses on the portion of company shares available for trading. Free float shares are those not held for company management purposes and are readily tradable in the market. This index is useful for evaluating market segments with higher liquidity.
This index tracks price changes in the 50 companies with the highest liquidity. The Securities and Exchange Organization updates this list quarterly. This index is useful for identifying the most actively traded stocks in the market.
This index is calculated based on the market value of the 30 largest listed companies and reflects the price changes of their stocks. It is useful for analyzing the status of major companies that significantly influence the market.
The Tehran Stock Exchange includes various industries such as petrochemicals, automotive, and basic metals. The industry index measures the price changes of production companies in these sectors, and each industry has its own specific index, such as the Automotive Index or Agriculture Index.
This index reflects the price changes of companies operating in the financial sector, such as investment firms and leasing companies.
Stock market indices, including the overall index and other indices, can be viewed on the official website of the Tehran Stock Exchange (TSETMC) as well as on brokerage trading platforms. The charts and changes in these indices enable investors to better analyze the overall market trend and its various sectors.
Iran’s stock market indices are powerful tools for analyzing the general condition and specific segments of the capital market.
