What are stock market indices? How to invest in them?

A stock market index tracks the overall price movement of stocks listed on an exchange or a specific group of stocks. It uses a base point in time as a reference, allowing for long-term evaluation of price trends while maintaining continuity over time.

While individual stocks can be bought or sold based on news specific to that company, stock prices in general tend to be heavily influenced by overall market trends.

That's why we use 'stock market indices,' which are numerical representations of the overall market movement. These indices are calculated by averaging the prices of a selection of stocks.

For example, the Singapore Straits Times Index (STI) is a stock market index made up of 30 leading companies listed on the Singapore Exchange (SGX). It's used as a key indicator of the overall price movement of stocks of major Singaporean companies.

A stock market index is like a 'basket' of stocks, carefully selected to represent various industries, sectors, and the overall economy. The combined movement of these stocks provides a clear and easy-to-understand picture of overall market trends.

Stock market indices are broadly calculated using two main methods: capitalization-weighted and price-weighted.Let's take a look at each.

Capitalization-weighted indices determine the weight of each stock within the indices based on its market capitalization (stock price multiplied by the number of outstanding shares), which represents its market value. This approach effectively captures the overall market value fluctuation of the component stocks. Notable examples are the Singapore Straits Times Index (STI), the Tokyo Stock Price Index (TOPIX), and the US S&P 500.

To better understand the difference between simple and weighted averages, let's consider a hypothetical scenario. Imagine a stock market with only two companies:

Simple Average:

($100 + $150) / 2 = $125

Weighted Average:

($100 * 1,000 shares + $150 * 2,000 shares) / (1,000 shares + 2,000 shares) = approximately $133

Therefore, capitalization-weighted indices are calculated by weighting each company's stock based on its proportion of the total market capitalization. This makes them sensitive to fluctuations in the stock prices of big companies, which have a larger market capitalization. For this reason, they are considered to be a reliable representation of the overall stock market.

However, even if many stocks rise in price, if big companies decline, the indices can also fall. This demonstrates that capitalization-weighted indices are significantly affected by the price movements of big companies.

Capitalization-weighted indices show how much the total market capitalization of the constituent stocks has changed from the base date set by each index, and are expressed in 'points.'

For example, the Singapore Straits Times Index (STI) uses August 28, 1998, and the Japanese TOPIX uses January 4, 1968, as their respective base dates for market capitalization. They are calculated and published using the formula: '(Market capitalization on the day) / (Market capitalization on the base date) * 100 (points).

Capitalization-weighted indices include prominent examples such as the US S&P 500 index, the NASDAQ Composite index, the Russell 2000 index, Japan's TOPIX index, the UK's FTSE 100 index, Germany's DAX index, Hong Kong's Hang Seng index, and Singapore's STI index.

Price-weighted indices are calculated by summing the prices of each component stock and dividing by a predetermined divisor. Examples of price-weighted indices include the Nikkei 225 in Japan and the Dow Jones Industrial Average (DJIA) in the US. This means that stocks with higher prices have a greater impact on the index.

Let's take a look at the US Dow Jones Industrial Average (DJIA) as an example.

The DJIA is calculated using the following formula:

DJIA = (The sum of the current stock prices of all 30 DJIA component stocks) / Divisor

The 30 constituent stocks of the DJIA are major companies that are leaders in their respective industries and are considered representative of the overall US market. The selection of these 30 companies is reviewed periodically to reflect changes in the market.

The 'sum of stock prices' is, simply put, the arithmetic sum of the current stock prices of all 30 component stocks.

The 'Divisor' is a number used to adjust the DJIA for stock splits, dividends, and other corporate actions, ensuring that the index accurately reflects market movements over time.

What are some of the major stock market indices globally?

NASDAQ is a stock market operated by the National Association of Securities Dealers, and is one of the major stock markets in the US, alongside the New York Stock Exchange. The NASDAQ 100 is a stock market index comprised of the 100 largest companies (excluding financial institutions) by market capitalization listed on the NASDAQ market.

The top holdings include global tech giants such as Apple, Microsoft, Amazon, Alphabet (Google's parent company), Meta (formerly Facebook), Tesla, and Nvidia.

The list of companies included in the NASDAQ 100 is reviewed and adjusted periodically. The 100 largest companies by market capitalization that qualify for inclusion in the index are selected based on the predefined indices methodology.

Major Companies in the NASDAQ 100 (as of February 2025)

1. Apple (AAPL)
2. Microsoft (MSFT)
3. Amazon (AMZN)
4. Nvidia (NVDA)
5. Meta Platforms (META/previously Facebook)
6. Tesla (TSLA)
7. Broadcom (AVGO)
8. Alphabet (GOOGL / GOOG)
9. PepsiCo (PEP)
10. Adobe (ADBE)

The Dow Jones Industrial Average (DJIA), also known as the Dow, is a widely followed stock market index in the United States. It comprises 30 major US corporations listed on the New York Stock Exchange (NYSE) and Nasdaq.

Among its top holdings are world-renowned companies such as Apple, Amazon, Boeing, Walt Disney, IBM, Coca-Cola, McDonald's, Microsoft, and Nike.

The 30 companies included in the DJIA are reviewed and may be replaced periodically to reflect changes in the US economy and market dynamics, ensuring that the index continues to be representative of the leading companies driving the market.

Major Companies in the DJIA (as of February 2025)

1. Apple (AAPL)
2. Nvidia (NVDA)
3. Microsoft (MSFT)
4. Amazon.com (AMZN)
5. Meta Platforms (META/previously Facebook)
6. Tesla, Inc. (TSLA)
7. Alphabet (GOOGL / GOOG)
8. Broadcom Inc. (AVGO)
9. Walmart Inc. (WMT)
10. Eli Lilly and Company (LLY)

S&P 500 is a benchmark US stock market index calculated by S&P Dow Jones Indices LLC. It is calculated using a capitalization-weighted method, including 500 large-cap US companies listed on the New York Stock Exchange (NYSE) and NASDAQ.

The S&P 500 is calculated with the average of 1941-1943 set as the base value of 10. Therefore, an S&P 500 value of 1,000 indicates a 100-fold increase compared to the 1941-1943 average.

The aggregate market capitalization of the S&P 500 companies accounts for approximately 75% of the total market capitalization of the entire US stock market, making it a crucial metric for gauging the overall health and performance of the US stock market.

Major Companies in the S&P 500 (as of February 2025)

1. Apple (AAPL)
2. Microsoft (MSFT)
3. Amazon.com (AMZN)
4. Nvidia (NVDA)
5. Alphabet (GOOGL / GOOG)
6. Tesla, Inc. (TSLA)
7. Meta Platforms (META/previously Facebook)
8. Exxon Mobil Corporation (XOM)
9. UnitedHealth Group Incorporated (UNH)
10. Johnson & Johnson (JNJ)

Russell 2000 is a widely recognized benchmark for small-cap stocks in the US, developed by Russell Investments in 1984. It is a market-capitalization-weighted index, adjusted for available float, including companies ranked from 1001st to 3000th by market capitalization that are listed on the New York Stock Exchange (NYSE) and NASDAQ.

Major Companies in the Russel2000 (as of February 2025)

1. Aadi Bioscience, Inc. (AADI)
2. Aaron's, Inc. (AAN)
3. AAON, Inc. (AAON)
4. American Assets Trust, Inc. (AAT) - Note: This company may no longer be publicly traded.
5. Ameris Bancorp (ABCB)
6. Asbury Automotive Group, Inc. (ABG)
7. ABM Industries Incorporated (ABM)
8. Arbor Realty Trust, Inc. (ABR)
9. Arbutus Biopharma Corporation (ABUS)
10. Arcosa, Inc. (ACA)

DAX (Deutscher Aktien Index) is the most important German stock market index, calculated using a market capitalization weighted average of 40 large-cap German companies listed on the Frankfurt Stock Exchange, which is operated by Deutsche Börse AG (the German stock exchange organization).

In September 2021, the DAX increased the number of constituent companies from 30 to 40, adding 10 new members such as Porsche, Puma, and Airbus.

The DAX constituents are reviewed quarterly based on trading activity and market capitalization. Germany is renowned for its automotive industry, and the index includes 40 major German companies such as Volkswagen (ETR: VW), Mercedes-Benz Group AG (DAI), and BMW (ETR: BMW), among other key players in the German economy.

Major Companies in the DAX (as of February 2025)

1. SAP SE (SAP)
2. Siemens AG (SIE)
3. Adidas AG (ADS)
4. Bayerische Motoren Werke AG (BMW)
5. Mercedes-Benz Group AG (MBG)
6. Volkswagen AG (VOW3)
7. Bayer AG (BAYN)
8. BASF SE (BAS)
9. Allianz SE (ALV)
10. Deutsche Bank AG (DBK)

The FTSE 100 is the most widely followed stock market index on the London Stock Exchange (LSE). It is published by FTSE International, a leading provider of stock market indices owned by the Financial Times and the London Stock Exchange Group. The index tracks the performance of the 100 largest-cap companies listed on the LSE. Collectively, these 100 companies represent approximately 80% of the total market capitalization of all companies listed on the LSE.

Major Companies in the FTSE (as of February 2025)

1. AstraZeneca PLC (AZN)
2. Shell PLC (SHEL) - Note: Formerly Royal Dutch Shell
3. HSBC Holdings plc (HSBC)
4. Unilever PLC (ULVR)
5. Rio Tinto PLC (RIO)
6. Diageo PLC (DGE)
7. BP PLC (BP)
8. British American Tobacco p.l.c. (BATS)
9. London Stock Exchange Group plc (LSEG)
10. GlaxoSmithKline plc (GSK)

The Nikkei 225 is a stock market index published by Nikkei Inc. It is calculated using the prices of 225 selected blue-chip stocks listed on the Tokyo Stock Exchange (TSE). It is used as a key indicator to gauge the overall movement of the Japanese stock market.

Major Companies in the Nikkei 225 Index (as of February 2025)

1. Toyota Motor Corporation (7203)
2. Sony Group Corporation (6758)
3. SoftBank Group Corp. (9984)
4. Keyence Corporation (6861)
5. Nintendo Co., Ltd. (7974)
6. Fast Retailing Co., Ltd. (9983)
7. Fanuc Corporation (6954)
8. Tokyo Electron Limited (8035)
9. Shin-Etsu Chemical Co., Ltd. (4063)
10. Takeda Pharmaceutical Company Limited (4502)

The Hang Seng Index is the most widely recognised stock market index that tracks the overall performance of the Hong Kong stock market. It comprises 83 prominent companies listed on the Hong Kong Stock Exchange (HKEX). Originally, the HSI primarily consisted of Hong Kong-based companies, but with the growth of the Chinese economy, the index now includes a significant number of companies from mainland China.

Major Companies in the Hang Seng Index(HSI)(as of February 2025)

1. Alibaba Group Holding Limited (BABA)
2. Tencent Holdings Limited (TCEHY)
3. HSBC Holdings plc (HSBC)
4. Meituan (MPNGY)
5. Xiaomi Corporation (XIACY)
6. China Construction Bank Corporation (CICHY)
7. AIA Group Limited (AAGIY)
8. China Mobile Limited (CHL)
9. Industrial and Commercial Bank of China Limited (IDCBY)
10. Hong Kong Exchanges and Clearing Limited (HKXCY)

There are two main methods to gain exposure to stock market indices.

Some investment trusts use stock market indices as benchmarks. Investing in these index-tracking funds can provide a comparable investment outcome to investing directly in the indices mentioned above. Additionally, investors can also gain exposure to stock market indices through Exchange Traded Funds (ETFs) that are listed and traded on the Singapore Exchange (SGX).

https://www.sgx.com/securities/etf-screener

SRS（Supplementary Retirement Scheme)

Furthermore, by utilizing the Supplementary Retirement Scheme (SRS), individuals can make investments and take advantage of tax incentives at the same time.

In addition to the methods mentioned above, traders can also take a position on stock market indices through Contracts for Difference (CFDs), which are financial derivative products that allow traders to speculate on the price movements of an index without actually owning the underlying assets.

There are three main features of CFDs.

1. Start with a smaller initial investment than the actual price.

CFDs enable you to trade on margin, using leverage, which means you can start with a smaller amount of capital compared to the underlying asset's value. For example, to trade directly in the Dow Jones Industrial Average, which is currently priced at $44,176.65 as of February 21, 2025, you would need the full price of the index.

However, with CFDs, you can utilize 20:1 leverage, allowing you to take a position with an initial margin of only $2,210. (Leverage means you control a larger position with a smaller amount of capital.)

However, if you fully utilize leverage, even a small price movement could trigger a margin call and lead to substantial losses. A margin call occurs when your account equity falls below a certain level, and your position may automatically close to prevent further losses. It is advisable to adjust your margin and position size to maintain a manageable level of risk in your trading activities.

1. Ability to Sell(Short)

In the physical market, you can only enter a long position, which means buying an asset with the expectation that its price will increase. However, stock indices CFDs offer the flexibility to enter a short position, allowing you to take a favourable position even when the market is declining. Short selling involves selling an asset you don't own with the expectation that its price will fall, and then buying it back at a lower price.

For traders who already have open profits in their physical market holdings, taking a short position in CFDs during a market downturn can serve as a hedging strategy to offset potential losses in their existing portfolio.

1. 24/5 Trading Availability

When trading ETFs, you are limited by the exchange's trading session. In contrast, CFDs offer the flexibility to trade around the clock, allowing you to place trades or manage your positions 24 hours a day, five days a week. This means you can react to news events and take advantage of market movements outside of regular stock exchange hours.

For example, OANDA provides access to NAS100 CFD trading between 17:01 on Sunday and 15:59 on Friday.

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