How do stock indices reflect market conditions? Methods of calculation and the most popular indices worldwide

Understand Stock Indexes More Deeply

When listening to economic news, you will often hear the term Stock Index (Stock Index) appearing frequently, from the NASDAQ 100 in the US to the Nikkei 225 in Japan. But what do these terms really mean, and how are they important for investing?

At its core, a Stock Index is a number that shows the change in stock prices of a group of companies, such as Thailand’s SET High Dividend 30 Index, which tracks the stock prices of 30 companies with high market value, high liquidity, and good dividend yields.

Key Features of a Good Index

A useful stock index must have outstanding qualities, be a real investment asset, and operate transparently. Many mutual funds choose to reference the SET50 and SET100 indexes. The difference between a fund’s performance and its benchmark index is called Tracking Error. The lower this value, the more effectively the fund can replicate the index’s performance.

Three Main Methods of Index Calculation

It turns out there is no single way to calculate an index; each method uses different principles.

Type 1: Market Capitalization-Weighted Index (Capitalization-weighted)

Larger companies with higher Market Cap have more influence on the index’s movement. This method is popular in indices like the S&P 500, FTSE 100, and Thailand’s SET.

Imagine an index G composed of stocks A priced at 4 baht with 100 shares, and stock B priced at 5 baht with 200 shares. The market value is calculated as Price × Total Shares:

• Stock A = 4 × 100 = 400
• Stock B = 5 × 200 = 1,000
• Total Market Cap = 1,400

The proportion in index G:

• Stock A = (400 ÷ 1,400) × 100 = 28.57%
• Stock B = (1,000 ÷ 1,400) × 100 = 71.43%

It’s clear that stock B, with a larger Market Cap, has a greater representation in the index.

Type 2: Price-Weighted Index (Price-weighted)

In this system, stocks with higher prices carry more weight than lower-priced stocks. The Dow Jones and Nikkei 225 use this method.

For example, index G has stocks A at 5 baht, B at 10 baht, and C at 15 baht. The proportions are calculated as:

• Stock A = [5 ÷ (5+10+15)] × 100 = 16.67%
• Stock B = [10 ÷ (5+10+15)] × 100 = 33.33%
• Stock C = [15 ÷ (5+10+15)] × 100 = 50.00%

The highest-priced stock C has the most influence on the index.

Type 3: Equal-Weighted Index (Equal-weighted)

The simplest method is to give each stock the same weight. This system diversifies risk well, but the downside is that the index can change rapidly and be difficult to manage.

Stock Indices Followed in Thailand

Besides the general SET index that tracks all stocks, Thailand also has SET50 and SET100, which are popular options.

Both indices show the rise and fall of 50 and 100 leading companies with the highest Market Cap, high trading volume, and a significant number of retail shareholders based on set criteria.

The calculation proceeds as follows:

SET50/100 = Current Market Value (CMV) ÷ Base Market Value (BMV) × 1,000

• Base date for SET50: August 16, 1995
• Base date for SET100: April 30, 2005
• Both start at 1,000 points

Note that the constituent companies of both indices change twice a year, in (June and December).

Major Stock Indices Worldwide

S&P 500 (United States)

The index of “the largest economy” is the S&P 500, which tracks 500 large-cap companies listed on US stock exchanges. It uses a Capitalization-weighted system emphasizing large companies.

Examples include Apple, Microsoft, Amazon, Berkshire Hathaway, Visa.

It is heavily traded and considered the best gauge of the US economy and the global market overall.

Dow Jones Industrial Index (United States)

The oldest index in America, using a Price-weighted system, tracks only 30 companies. Although few, they are giants like Microsoft, Coca-Cola, Apple, and McDonald’s.

Compiled by S&P Dow Jones Indices.

NASDAQ 100 (United States)

Preferred by investors interested in technology and innovation, NASDAQ 100 includes 100 non-financial companies listed on the Nasdaq.

Main components: Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG, GOOGL). These four are “multi-trillion dollar giants” driving the digital economy.

Launch date: January 31, 1985.

( Nikkei 225 )Japan###

Japan’s economic representative is the Nikkei 225, which tracks 225 leading Japanese companies listed on the Tokyo Stock Exchange. It has been compiled by the Nikkei newspaper since September 7, 1950, over 70 years ago.

It reflects the Japanese stock market’s performance and post-World War II economic conditions.

( FTSE 100 )United Kingdom(

The top 100 companies by Market Cap on the London Stock Exchange. FTSE 100 stocks account for 81% of the total market value of the UK stock market. Due to this high proportion, it is used as a market indicator for the UK.

Compiled by FTSE Group )Companies listed on the London Stock Exchange###

Examples: Tesco, Unilever, Barclays.

( DAX 30 )Germany(

A similar format to the Dow Jones in Germany, comprising 30 leading blue-chip companies listed on the Frankfurt Stock Exchange.

Because there are only 30 companies, the DAX 30 index may not fully reflect the entire German economy.

Launch date: July 1, 1988.

Examples: BMW, Adidas, Bayer, Deutsche Bank.