7/29/2022 - Economy and Finance

Bursatile Index: What is it and how is it calculated?

By Gustavo Neffa

Bursatile Index: What is it and how is it calculated?

The first thing that makes a good investor when you get up, even before taking breakfast, is to see how future stock rates come, and know how the indices of those scholarships that have already opened, besides taking note of how close the indices of Asian countries have already closed. The US is the one that always defines the evolution of most other bags, but the different time usages make it important to monitor the evolution of the rest of the indices as well.

What is a stock index?

A stock index is simply a numerical value. It is a guide that summarizes the performance of a stock exchange or stock market. It is a value that arises from a calculation that is the mathematical weighting of a set of shares quoted in the shareholders markets to thus measure the increase or low in the price of the shares through the values included in the index. It is a numerical value that tries to reflect the variations of average value or profitability of the values that make it up.

This average can be weighted (in most cases, by the weight of your stock exchange), or simple, depending on the constitution of the indices, although most are weighted.

Something very important to take into account is that indices cannot be operated directly, but can be operated through contracts of futures to a given date as any other future, through common investment funds that accurately replicate the composition of the index (most of them, however, try to win for what will not have the same income) or through the ETFs of indices (investment funds listed in stock). In the latter case, if the investor wants to expose himself to the S&P 500 he can buy the SPY which is in charge of replicating that North American stock index.

Investors often mix stock index definitions with stock exchanges, because often the media give us information in a confusing way. An index may reflect the average movement of stocks of a bag, but a bag is not necessarily an index. Nasdaq is both an index and a purse.

The oldest American index is the Dow Jones Industrial Average, simply known as Dow Jones, which was created by Charles Henry Dow together with the Wall Street Journal to measure the economic and financial activity of the United States in the late 19th century. It is the first of three indices, since at the time the economy, in addition to industrial companies, was heavily influenced by electricity and transport companies, hence the two remaining indices.

On many occasions, there is a number that accompanies the name it receives, as is the case of the FTSE 100 of Britain, the DAX 30 of Germany, the CAC 40 of France or the Ibex 35 of Spain. This number indicates the amount of companies that make it up. For example, the Nasdaq 100 consists of 100 companies and the Nikkei 225 by that specific number. This number does not vary and the “cut” is always done in the same number of companies, whose names vary from period to period, unlike other indices that have a variable number of companies entering and leaving and no matter how many actions it contains, but that this number is variable.

The number of companies is important, since sometimes it may occur that, if a descent much in their quotation and/or capitalization of the stock exchange, when this stock index is updated as to the companies participating in it may no longer be included in it and enter another company to be part of it. Normally, the rates rebalance every 3 or 6 months and, depending on their stock capitalization, which is calculated by multiplying the number of total stocks quoted (including the preferred ones) at their price. It is the value or “weight” that the company has in the bag.

The vast majority of indices of the world use the weighting by capitalization of the bag: In its elaboration, it was given greater weight on the actions of some companies in relation to other actions, in order to ensure that the market situation is real.

Perhaps the most famous of all just does not use it: the Dow Jones index, which is very criticized precisely by this fact. Although, on the other hand, it is included in this index, companies have to have certain characteristics, among which the market size (large) partially compensated.

The so-called “points” of an index evolve with the movement of the actions they represent, but have all of them a beginning at one point, called base bag (like any other index). Some investors are (mal) accustomed to measuring a drop or rise strong from an index by the amount of points, such as “Dow Jones climbed 100 points”. But this value may represent very or little depending on the value of the index (the basis), and should not be taken into account. The percentage variation is always more important than the evolution of points.

Two ways in which an index can be weighted

The simple weighting equalizes all companies, regardless of the value of their shares and the quantity of them, so it is calculated by making a weighted average of the suba or low percentage of the shares included therein. The disadvantage of a simple weighting index is that it can lose much ground a large company and a very small company win the same in its quotation and the index does not reflect the creation or destruction of value because both values would be compensated in the index.

Instead, in The weighting by capitalization of the bag is taken by the value of the shares, as well as the number of them. A stock capitalization index is much more complex, but the advantage is that it gives greater importance to companies that actually have, since it gives them a much more important value for content conformation.

What happens in the case of Argentina?

Specifically the case of Argentina, the reference index or “benchmark” is the Merval S&P Index that varies from quarter to other depending on a formula that includes the amount of operations and the transated volume of the last six months and which cuts by 80% of this calculation (from down there the companies will not be included).

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gustavo neffa

Gustavo Neffa

I'm Gustavo Neffa. Director of Economics and Finance at FinGurú. Partner and director of Research for Traders, leading a team of market analysts. I spent the last 24 years in the financial sector in both domestic and foreign entities, having occupied the post of Senior Research Analyst in Macrosecurities of the Banco Macro and the BBVA Banco Francés, as well as economic analysts with the economist in chief of the BBVA Banco Francés. I am also a professor in Corporate Finance, Investment Portfolio Management, Financial Asset Valuation, Valuation of International Investment and Finance Projects in various MBAs and postgraduate courses in Buenos Aires and in the interior of the country and professor of the MBA of the UNLP and the UNNE of Financial Asset Assessment and the postgraduate degree in the UBA Capital Market in agreement with ByMA. Co-director of the UNLP Advanced Finance Programme.

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