Chapter 13. Main stock exchange indices

Futures are divided into two types: settlement futures and delivery futures. Settlement futures (non-deliverable futures) are used when only cash settlements are made between the parties, while there is no physical delivery of the underlying asset. Thus, the seller does not deliver the commodity after a specified period of time. The exchange settles between the parties. Settlement futures are used to purchase an underlying asset such as a stock index or currency.

In the following chapters, we will familiarize ourselves with the concept of a stock index, find out what its importance is in market research, and examine the leading Russian and world stock indices. First, let us define the concept of a stock index.

A stock exchange index (stock index) is a composite indicator of price change for a certain group of assets (commodities, derivative financial instruments, securities), which is called an “index basket”.

By compiling an exchange index for a selected group of securities and other assets one can see the behavior of a particular market sector. With its help, investors can trace the mood of the market (its direction of movement) or a particular sector. This is possible even if asset prices within the index sample change in different directions.

So why do we need a stock index? The stock index itself does not mean anything. It is an ordinary number without value expression. What is interesting is not the stock index itself, but its dynamics, which is formed by daily calculations of the index.

Instead of studying and analyzing large volumes of information on all traded securities, it is much easier for an investor to track the necessary stock exchange indices in order to see the state of a particular sector of the economy or its overall picture as a whole. It should be said that nowadays stock exchange stock indices are often used to judge the state of the economy of entire countries. In case when the dynamics of indices is negative, i.e. the market is falling, it is called “bearish”. When the movement is upward, the “bulls” take over.

All stock exchanges calculate their stock indices based on the securities traded on them. Besides, markets and exchanges can simultaneously calculate several stock indices containing different “index baskets”. The values of stock exchange indices and their dynamics are published in mass media, in regular summaries of financial news, as well as on informational Internet sites.