• Stock Exchange indexes

The stock exchange indexes are based on the selection of some stock-exchange values according to their representativeness. The stock-exchange index is a statistic measure calculated by the grouping of the stock values of several societies. The stock-exchange index is usually used to measure the performance of a stock exchange or a market. The stock-exchange index provides a general trend of the evolution of the market and so it eases the comparison between the different stock-exchange scenes.

General points

The result of a stock exchange is generally measured by several indexes:

- The main index which measures the global result of the stock exchange; this index is calculated from the majority of major companies registered to this stock exchange.
- Sectoral indexes which measure the result of a sub-group of companies that have common characteristics; those indexes are calculated from the companies included in the sub-group aimed (for example, the companies of a sector of activities such as telecommunication or companies of similar size like small companies).

Some indexes reflect the economic activity of a region and include societies listed on different stock exchanges. Those indexes are generally published by independent societies, such as the Dow Jones Industrial Average and the S&P 500 include listed societies on the three stock exchanges of New York, the NASDAQ stock market, the New York Stock Exchange and the American Stock Exchange.

The investissement in tools that replicate the performance of a stock-exchange index enables an average investor to make his investment vary at the same rhythm as the stock exchange (rising or decreasing) without having to buy stocks of several companies. Two products of this type are available in most countries:

- CMF (Cash mutual fund) or CIF (Common investments funds) indexed.
- The indexed funds negotiated in stock exchange that are CMF continuously listed on stock market ; like those funds debit management expenses less expensive than the CMF or CIF (about 0.5% compared to 2 to 3% for CMF and CIF), their popularity increases very rapidly.

Simple or balanced index : method of calculation

Some stock-exchange indexes are calculates from easy arithmetical means (sum of derived market prices by the number of stocks). The balanced index is calculated by taking into account the relative weight into the total stock-exchange capitalization of each element composing it.

• The CAC 40
As its name implies, it is composed of forty values. The letters CAC correspond to the French meaning: Cotation Assistée en Continu or Continuous Assisted Quotation, in English. The forty values are selected among the 100 first stock-exchange capitalizations of the market with monthly payment that are the subject of the most profuse. The CAC 40 is an index established on forty values of the monthly regulation, representative of different branches of activities.

Therefore, the index reflects, in theory, the global « atmosphere » of the economy of French major firms. The CAC is updated every thirty seconds during the day. It then enables the investors to continuously measure the evolution of the market.

It is a measuring tool of the behaviour of the market and a comparison tool very useful when someone possesses a share portfolio. It began in 1988 with a base fixed at 1 000 points on December, 31st 1987. This index is calculated according to balanced mean of the values that compose it (a ration is affected to each society).

Since November 2003, the CAC40 has been calculated on the basis of the floating capitalization and no longer on the market capitalization basis. Following the example of the main big market indexes, the balances of the values that compose the CAC 40 are now going to be evaluated by taking into account the section of the capital held by the public(floating capitalization), and they are not going to be based on the total capital issued by the societies anymore.

• The SBF 120 index
This market index, as its name implies, results from the evolution of the market prices of 120 firms listed on the official market. The sample taken as a calculation basis to this index is therefore three times higher than the CAC 40 index.

• The SBF 250 index
It is a major index because it represents the largest number of businesses listed on the official market. It is composed of 250 values of the official list. The sample enables to moderate the excesses. The rising and the decreasing are lower than the CAC 40 index.

The international market indexes

• DOW JONES: the Dow Jones index is certainly the most famous of all the market indexes: it is the reference index of the world primary financial market, The New York Stock Exchange. The Dow Jones index is composed of the 30 biggest American capitalizations (Blue Chips) that are the main 30 values of the New York Stock Exchange. Its calculation is really easy and radically different from the one of the CAC 40. There is no balance and each value composing this index has the same representativeness inside the Dow Jones. It mainly reflects the evolution of the industrial values. The evolution of the Dow Jones is observed by all the investors for it is so important in the international economy that it often gives the tone to the other financial scenes.

• DOW JONES (STOXX) : so that London does not get the monopoly of the management of indexes and European by-products Paris, Frankfort and Zurich) associated to the American press company Dow Jones to start on February, 22nd 1998 a family of 4 European indexes. The Stoxx and the Euro Stoxx respectively include the 655 values of the 16 countries of Western Europe and 325 societies of the 11 countries of the euro zone. The Stoxx 50 and the Euro Stoxx are holding 50 firms among the biggest capitalizations of large indexes. The selection of the values takes into account the size of the firm, its sector of activity and the liquidity of the stock. The 50 values composing the Euro Stoxx (basis 1000 on December, 12th 1991) do not all weight the same (14 French societies are part of them, but they only have 23% of the capitalization of the index). The 11 German values represent 29,3%.

• DAX 30: It includes 30 values representing about 70% of the total capitalization and 80% of the transactions on the shares on the Frankfort scene. Like the CAC 40, it is a capitalization index, but with reinvested dividends. Contrary to the other indexes, it is therefore adjusted to take into account the dividends paid by the societies that compose it. The hypothesis being that the sum of those dividends is immediately reinvested. The base of 1000 points dates from the 1st of January, 1989.

• NASDAQ: (National Association of Securities Dealers Automated Quotations) created in 1971, elaborated by the NASD (National Security Dealers Association). It was then the first electronic market of financial tools in the world. The NASD, this national association of shareholders, has a juridical status very close to a non-profit society. Its commercial name is for that matter, The Nasdaq Stock Market Inc. Today, the NASDAQ index is the one of the biggest electronic market in the world.

• NIKKEI 225 : the Nikkei 225 is the main market index of the Tokyo Stock Exchange. The term Nikkei is the abbreviation of «Nihon Keizai Shinbun», the name of the daily economic newspaper that publishes this index. It is composed of 225 societies. The Nikkei has been created on May, 16 1949 (year of the base 100). This index is calculated by an arithmetic mean of the values that compose it, without any balance by the market capitalization of stocks that compose it. This index was at about 40.000 points at the end of 1989 and at 15.000 in 1992, following the explosion of the financial bubble. Between 200 and 2003, it has accentuated its fall to reach a lower than 20 years ago. Thanks to the return in the good graces of the Japanese economy after a long stagnation of a decade, the index has grown, closing at the end of 2005 at more than 16.000 points, following the second semesters 2004 and 2005 that have been the scene of stock-exchange rallies particularly marked.

• FTSE 100: The FTSE 100 or Footsie is the star index of London Stock Exchange (LONDON STOCK EXCHANGE), created in 1984, it includes 100 societies representing 70% of the market.

Calculation of the index

Most of the major stock-exchange indexes are calculated by the division of the sum obtained from the addition of societies market capitalizations by a constant value so that the value of the index is a relatively small number.
Nowadays, the calculation of several market indexes only takes into account the floating of the societies composing it, it means the part of the society actually likely to be exchanged on the market, which exclude the blocks of more than a certain percentage of shares (generally 20%) held by an organism or by a group of united organisms. It is said that some organisms are united when one of them can have an influence on the decisions of another one.
Other ways to calculate a market index by going by other parameters than the market capitalization such as the value of a share, the volumes of transaction …