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What every investor should know about indices

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Every viewer encounters well-known indices, such as the DAX and Dow Jones, every day in the programme on the news. But what are indices anyway? How are they composed? And are indices suitable as an investment? 

What is an index?

An index, which is the singular of indices, can be thought of as a basket consisting of a certain number of securities. Which securities are included in the index is determined by certain criteria. An index can represent a market, a specific country or an entire industry.

The index level is expressed as a single number. It is the average value of all security prices contained in the index. Over time, the index tracks the price development of the securities contained in the index.

In addition to bond indices, stock indices are the most common form of securities indices. The best-known German share index is the Deutsche Aktien Index. The DAX contains the 30 largest German companies with the highest turnover.

Indices are interesting for investors because it is easy and inexpensive to invest in most indices by means of so-called Exchange Traded Funds, or ETFs for short. This saves the somewhat riskier individual stock selection. More on this later.

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How are indices composed and how are they calculated?

Here is explanation from exnessthai.com: การรวมหลักทรัพย์ในดัชนีนั้นเชื่อมโยงกับข้อกําหนดเฉพาะของผู้ให้บริการดัชนีที่เกี่ยวข้องในพื้นที่ ภาพรวมของโบรกเกอร์ Exness. การเลือกสามารถทําได้ตามเกณฑ์ที่แตกต่างกันเช่นมูลค่าตลาดอุตสาหกรรมภูมิภาคหรือการรวมกันของเกณฑ์เหล่านี้.

The inclusion of securities in an index is linked to the specific requirements of the respective index provider. The selection can be made according to different criteria, such as market capitalisation, industry, region or a combination of these criteria.

Each newly launched index starts with a certain value and is calculated continuously from that point on. The basis for the DAX, for example, was 1,000 points in 1988.

What is the difference between a performance or price index?

The difference is quickly explained: It lies in the different consideration of dividends. With a price index, only price changes are taken into account. The dividends paid out by the companies included in the index are not included in the calculation. This form is the most common among the indices.

With a performance index, on the other hand, all dividend payments are included in the index calculation. It is assumed that all distributed dividends are reinvested. Performance indices, such as the DAX, are less common. By taking dividends into account in share indices, the performance index naturally increases more than a price index in a direct comparison.

 

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