Whether in the stock market, bond market, or commodity market, indices play a crucial role by reflecting the overall performance of specific markets or sectors through a simple numerical value. In a broad sense, any relative number formed by comparing two values can be called an index; in the financial field, an index is a special relative number used to measure the comprehensive changes of multiple items under different circumstances. With the development of financial markets, indices have become important tools for investors to understand market dynamics and formulate investment strategies, and are also the foundation for derivative development and asset allocation.
Definition and Nature of Indices
An index is essentially an indicator that measures the performance of specific markets, sectors, or asset portfolios. It derives a numerical value through selecting a group of representative constituent stocks or other financial instruments and calculating their weighted average according to certain methodologies, reflecting the overall price movements of these components. For example, a stock index contains various stocks and is data that reflects the value of constituent stocks in the market. It is typically used to demonstrate the common characteristics of constituent stocks, such as trading on the same stock exchange, belonging to the same industry, or having similar market capitalization.
Classification of Indices
By Asset Class
According to asset categories, indices can be mainly divided into three major categories: stock indices, bond indices, and commodity indices. Stock indices reflect the price trends of specific stock markets, such as well-known indices like the Shanghai Composite Index and the Dow Jones Industrial Average. Bond indices specifically reflect price trend changes in specific bond markets. Commodity indices reflect the price trends of tradable bulk commodities, including important commodity indicators such as gold indices and crude oil indices.
Stock Index Subcategories
Stock indices can be further subdivided into multiple subcategories:
Broad-based indices represent the overall performance of a market or sector, with constituent stocks including companies from various industries. Typical examples include the CSI 300 Index and the S&P 500 Index.
Sector indices have constituent stocks that all belong to a specific industry, such as the CSI Liquor Index and CSI Baijiu Index, which are highly specialized indices.
Thematic indices have constituent stocks that share certain common thematic attributes, such as the CSI Mainland Low Carbon Economy Theme Index.
Strategy indices select constituent stocks based on specific strategies, including different strategic dimensions such as dividend, low volatility, fundamental, and value strategies. The SSE Dividend Index is a typical representative of this category.
Index Compilation Methods
Index Compilation Process
Index compilation is a systematic engineering project that can be roughly divided into five key steps:
Define compilation objectives - Determine the fundamental purpose of compiling the index, such as whether to comprehensively display overall market trends or focus on specific industry themes.
Define sample space - Determine the selectable range of constituent stocks. For example, the sample space of the CSI 300 Index consists of all listed companies in the Shanghai and Shenzhen markets.
Select index components - This stage requires screening stocks through more refined sampling methods based on established objectives, ensuring the index has both representativeness and investability.
Calculate weights and points - According to predetermined calculation methods, precisely calculate the weight of each constituent stock and the specific points of the index.
Daily maintenance - Conduct regular and irregular maintenance and adjustments to the index's samples and weights to maintain the index's effectiveness and accuracy.
Main Calculation Methods
When calculating stock indices, three core factors need to be considered: sampling methods, weighting approaches, and specific calculation procedures. Currently, common calculation methods in the market mainly include the following types:
Market Capitalization Weighting
This is the mainstream method adopted by most indices, fully considering the market scale of each company when calculating the entire index value. Under this method, the larger a company's market capitalization, the more significant its stock price's impact on the index. The S&P 500 Index, NASDAQ 100 Index, and Hang Seng Index all use this calculation system.
Price Weighting
This method is based on the actual stock prices of companies included in the index, rather than the company's overall scale. Under this method, companies with higher stock prices have greater impact on index value. The Dow Jones Industrial Average and Nikkei 225 Index are two important indices that use this calculation system.
Equal Weighting
This method assigns the same weight to each constituent stock, without bias toward any particular constituent stock.
Factor Weighting
This method selects specific indicator characteristics of constituent stocks for weighted calculation. For example, the CSI Dividend Index uses the dividend yield of constituent stocks for weighting.
Major Global Stock Market Indices
Major US Indices
The US stock market boasts several significant indices with global influence. The Dow Jones Industrial Average is the world's most renowned and oldest index, comprising the stocks of 30 of America's most influential large-cap public companies. This index uses a price-weighted calculation method, and although it only includes 30 stocks, its selection of leading companies across various industries grants it strong representativeness.
The S&P 500 Index is composed of the top 500 US public companies selected by a professional committee, accounting for approximately 80% of the total US stock market capitalization. It effectively reflects the overall trend of the US market. This index is calculated using a market-capitalization-weighted method, giving larger companies a greater impact on the index, making it an important benchmark for measuring the performance of US large-cap stocks.
The Nasdaq Composite Index includes all stocks listed on the Nasdaq Stock Market, with a particular emphasis on the performance of technology stocks. As the Nasdaq market gathers a large number of technology and internet companies, this index is often seen as a crucial barometer for tech stock performance, providing significant guidance for global technology investments.
Major Chinese Indices
After years of development, the Chinese stock market has formed several representative and important indices. The Shanghai Composite Index, compiled by the Shanghai Stock Exchange, includes all A-shares and B-shares listed on the exchange. It is calculated using a market-capitalization-weighted method, meaning stocks with larger market capitalizations have a greater impact on the index. Changes in the Shanghai Composite Index can effectively reflect the overall trend of the Chinese stock market and shifts in investor sentiment.
The Shenzhen Component Index, compiled by the Shenzhen Stock Exchange, primarily reflects the performance of stocks in the Shenzhen market. Its constituent stocks cover companies from the Main Board, SME Board, and ChiNext Board of the Shenzhen Stock Exchange. Therefore, it can more comprehensively reflect the performance of different sectors within the Chinese stock market, offering investors more detailed market insights.
The CSI 300 Index comprises 300 high-quality stocks from the Shanghai and Shenzhen markets that have large market capitalizations and good liquidity, representing the stock price performance of a group of large companies in the A-share market. This index covers approximately 60% of the market capitalization of the Shanghai and Shenzhen markets, possessing good market representativeness and serving as an important benchmark index tracked by domestic and international fund products.
Other Major International Indices
Other major global economies also have their own representative indices. The Nikkei 225 Index includes 225 of the most actively traded and liquid stocks on the Tokyo Stock Exchange, serving as an important indicator of the overall performance of the Japanese stock market. The Hang Seng Index is a key indicator reflecting the performance of the Hong Kong stock market, composed of 50 Hong Kong blue-chip stocks, holding a significant position in the Asian financial market.
The German DAX Index is one of Europe's three major stock indices. It covers 30 major German companies across various industries, representing the stock market performance of Europe's largest economy. The UK FTSE 100 Index comprises 100 companies listed on the London Stock Exchange with the largest market capitalizations, serving as a significant benchmark for the British stock market.
The role and significance of indices
As a market benchmark, the index plays an important role as a market barometer, which can reflect the market average, facilitate investors to compare with individual portfolios, help investors objectively evaluate investment performance, and adjust investment strategies in a timely manner. When the Shanghai Composite Index continues to rise, it usually indicates that the Chinese A-share market is in a relatively optimistic state and investor sentiment is relatively positive. When the index falls, it may indicate pessimism in the market and investors need to be cautious.
The changes in the index not only reflect the fluctuation of prices, but more importantly, reflect the comprehensive judgment of market participants on various factors such as economic prospects, policy environment, and industry development. By observing the performance of different types of indices, investors can better grasp the pulse of the market and understand the internal logic of the market.
