Like any other activity in life, investing requires time, but also preparation. While at BBVA New Gen we help you design the best investment strategy for your goals, it is also valuable to know basic financial concepts so that you are 100% up to date with what is happening with your money.

In this opportunity, we want to tell you about global investment indexes, also known as stock market indexes.

Concept: stock indexes

Global investment indexes are a reference tool we use to get an approximate idea of the value of certain industries on the stock exchanges. A stock index is mainly used to analyze changes in the prices of the securities of several companies quickly, without the need to evaluate them one by one. In this way, we obtain a general idea of the situation of such a set of securities on the stock market.

Take, for example, the first investment index, created in 1882 for a New York Stock Exchange prospectus – which you have probably heard or read about: the Dow Jones, named after its creators, Charles Dow and Edward Jones.

The Dow Jones as the first stock market index

Charles and Edward, financial journalists, tracked the stock prices of nine American companies. In 1889, they decided that the composition of this index should be purely industrial and thus created a tool that, at a glance, gave us an idea of the industrial situation in the USA through 12 companies, of which today only General Electric is still in force.

At present, the Dow Jones continues to be an important indicator of the North American industries, contemplating 30 of the main companies in the world, although its composition may vary over time, so it is advisable that, if you create an investment strategy based on the Dow Jones, you should also monitor the changes that may occur in the companies that compose it.

How to use a stock market index?

These tools can help us to:

– Know how much confidence the market places in the companies that comprise it;

– Serve as a benchmark to measure the performance of the assets associated with it;

– Serve as a basis for investment instruments such as ETFs, which we discussed in a previous installment;

– Measure market risk and return for our strategy.

How are investment indexes calculated and which ones exist?

There are three main types of stock market indexes, which are:

1. Equally weighted indices: which is basically the average of the return of each security that makes up the index.

Weighted price indexes: which, instead of taking profitability as a variable, take into account only the price of each security included in the index. The Dow Jones is a weighted price index, as is the Nikkei.

3. Capitalization-weighted indexes: these are obtained from the market capitalization (i.e. the total value of a company’s shares listed on the stock exchange) of each component security. Examples of this type of indexes are the IBEX 35 and the S&P 500.

To learn more about investment concepts or request support to create your own financial asset strategy, explore BBVA New Gen and don’t hesitate to contact us! We are here for you.