CISI – Financial Products, Markets & Services

Topic – Equities
(4.1.9 and 4.1.10) Stock Exchange Indices

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Learning Objectives

1. Know the types and uses of a stock exchange index

2. Know to which markets the main indices relate to

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Stock Market Indices

The media refer to stock market indices daily,

reporting on movements in the FTSE, Dow Jones
and others.

You have come across indices before which are

used to measure different things:

e.g. Retail Price Index (RPI) and Consumer Price

Index (CPI) both measure inflation

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Share Indices

Sell
Double top ‘M’
Much Higher Numbers –
reflects a number of
Buy points, not share price

Sell
Double bottom ‘W’

Buy

Sell

The line is not as erratic in its movements

Buy compared with the share price charts – it
provides a snapshot of overall share price
movements in the FTSE 100 companies cisi.org
Stock Market Indices
The FTSE 100 is an example of a stock index.

Stock indices do the following:

 Provide a snapshot of how share prices are performing in a particular stock market,
or across several markets.

 Measure price movements in markets across a number of different types of stocks.

 Calculate the aggregate price movement of its targeted stocks on a daily basis,

 Provide a single figure for ease of comparison.

Benefits of share indices

 Allows investors to gauge the overall performance of the market (not
easy to do by looking at individual share prices)

 A stock index will smooth out anomalies and provide a consistent

picture of the mood across the market.

 Provide a benchmark for investors - assess whether their portfolios of

shares are doing better (outperforming) or worse (underperforming)
than the market in general.
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Stock Market Indices – Measurements A selection of shares from
several stock markets
around the world
A selection of shares from

Measures price movements across

a single stock market
e.g. Shares classified
according to size (market
capitalisation) All shares listed on a single
stock market.

Mid cap companies

(market capitalisation value
of between $2 billion to $10
Small cap companies billion)
(market capitalisation
value of between $250 Large cap companies
million–$2 billion) (market capitalisation value
of more than $10 billion)

Provide a Pharmaceuticals
snapshot of how
share prices are
Utilities
performing in a
particular stock
market, or across Industrials
several markets
‘Green’ stocks (following ‘Sin free’ stocks (Avoiding
sustainable and earnings from alcohol,
environmentally friendly
policies)
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tobacco, gambling and
weapons)
Stock Market Indices - UK

 AKA the ‘Footsie’

 Index of the next  Combination of  Covers over 800
 Index of the
250 medium sized the FTSE 100 and companies.
largest 100 UK
(mid cap) FTSE 250 indices.  Includes FTSE 350
companies
companies below  The 350 is broken  Accounts for 98% of
 Covers about
the 100. down into the UK market
70% of the UK
industry sectors value.
market value
e.g. retailing and  Used as a
transport benchmark against
which diversified
share portfolios are
assessed.

all reviewed every 3 months.

Companies with a share price growing strongly and a significantly increasing market
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capitalisation replace those whose share price and market capitalisation is static or
falling
Stock Market Indices - World

Xetra DAX
30 Stocks
Hang Seng
225 Stocks 40 Stocks
58 Stocks
Dow Jones S&P 500 Nasdaq Composite
Industrial Average A wider view Focuses on shares
(DJIA or ‘The Dow’) of the US stock traded on the
A narrow view of market Nasdaq
the US stock 500 stocks Includes many
market technology
30 stocks companies cisi.org
3000+ stocks