Stock indices are a massively important feature of the financial markets, with indices such as NASDAQ, Dow Jones, and FTSE 100 among the top names in the financial world. So how do indices work?
A stock index is a measure of how a group of shares perform in terms of price. For example, the FTSE 100 represents the 100 biggest stock trading in the London Stock Exchange. If the price rises for those stocks, the FTSE 100 will go up. If the price of those stocks falls, the FTSE 100 will go down.
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How Are Stock Indices Calculated ?
Before the digital era it was not easy to calculate index price. Most stock indexes today use a weighted average formulation to determine the index value.The weight of each share in this system is:
Share price X number of shares/market capitalisation of all shares
Most indices weigh corporations by market capitalisation. If a company’s market capitalisation is £1,000,000 and the value of all the index shares is £100,000,000 pounds, then the company will be valued at 1% of the index.
That means the valuation of a stock index is a statistical calculation of movements in a portfolio of shares representing a part of the market.
Live markets and data indices
Indices are commonly traded using the underlying cash or futures. While the underlying cash indices trade at various times depending on the broker, futures trade approximately 24/5.
The table below shows the key trading hours (GMT) of the common market for cash indices. Although the indices trade outside the major market period however, it has a wider spread as a result of a lack of liquidity.
Main market opening hours
Main market closing hours
Hong Kong HS50
16:59pm (with breaks)
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