90. Role of stock indexes (stock market indexes) at the financial market.

A stock index or stock market index is a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

Although the stock market is much more dynamic than the indexes suggest, along with the fact that there are different ways to calculate the indexes, causing calculation bias, the stock market indexes are useful in a number of ways to stock investors.

1. First, the market indexes provide an historical perspective of stock market performance, giving investors more insight into their investment decisions. Investors who do not know which individual stocks to invest in can use indexing as a method of choosing their stock investments. By wanting to match the performance of the market, investors can invest in index mutual funds or index exchange-traded funds (ETFs) that track the performance of the indexes with which they are aligned. This form of investing gives investors the opportunity to do as well as the markets and not significantly underperform the markets. So, Indexes can provide a quick snapshot to see how a specific group of stocks performs compared to other groups of stocks. Because performance varies greatly from one sector to the other, it's very useful to know your way around the major Indexes.

2. The second benefit of stock market indexes is that they provide a yardstick with which investors can compare the performance of their individual stock portfolios. Individual investors with professionally managed portfolios can use the indexes to determine how well their managers are doing in managing their money.

3. The third major use of stock market indexes is as a forecasting tool. Studying the historical performance of the stock market indexes, you can forecast trends in the market.

4. All major stock market centers around the world have key indices by which the economic performance of the region is evaluated.

In the United Kingdom we have the FTSE 100 while in the USA the most commonly referred benchmarks are the Dow Jones and the S&P 500. The situation is similar in Europe with each exchange having its own main index indicator although some of these indices are now quoted on pan-European platforms. NYSE Euronext was the result of a merger of America's NYSE with Euronext and now houses the AEX for the Netherlands, Bel-20 for Belgium, CAC-40 for France and PSI-20 for Portugal. In Germany, the independent Deutsche Boerse quotes the DAX 30 index while in Italy the Borsa Italiana [now part of the London Stock Exchange Group (LSE)] quotes the MIB-30 index. In Spain, there is the IBEX-35 which is the benchmark of the Bolsa da Madrid, Spain's main stock exchange.

Studies have shown that all the indexes are correlated; that is, they all move together in the same direction. However, there are some differences. The Nasdaq and the AMEX indexes are not as highly correlated with the S&P 500 and the DJIA. This makes sense because companies in the Nasdaq and AMEX indexes are younger, smaller, and riskier than the companies in the DJIA and S&P 500 Index.