How are industry index cards useful?

What is a stock index - and what indices are there?

A share index bundles the performance of several companies - depending on the country, region or industry. This gives shareholders an overview of the situation in a particular market. Find out which indices are available and what they can tell you as an investor here.

To see how a company's value is performing on the stock market, you can track the company's share price. If you want to know how several listed companies in entire regions or industries are developing, it is worth taking a look at a so-called stock index.

This shows the average performance of certain companies that are listed in it. It is important for you as an investor because you can see whether the companies in a country or an industry are increasing in value or not.

What is a stock index?

A stock index is a measure of the performance of several specified companies on the stock exchange. So it shows how a number of companies - which are listed in it - increase or decrease in value on average.

As an investor, you can easily see how a certain industry or company in a region has developed. The number of groups that are combined in an index varies from index to index (see below).

There is also a difference whether the stock index is a so-called price index or a performance index: A Price index only shows the prices of the shares. A Performance index also takes into account dividends, i.e. the part of the profit that a company pays out to its investors.

Whether a stock index rises or falls depends on the price development of the "individual stocks" it contains. This is what the shares of companies that are combined in an index are called. However, not all individual prices have to go up for a rising index price.

The main reason is that the price developments of the stocks within the index can also cancel each other out. Another factor is that not all companies in the index have the same weighting, which means that they have different degrees of influence on the index's performance (see below).

What does the weighting of the stocks mean?

The weighting of a stock index describes how strongly individual stocks determine the performance of the index. The aim of a weighting is that the share prices of different companies have a stronger or weaker influence on the development of the entire index.

Essential factors for determining the weighting of individual companies within a stock index are the stock price, sales and the value of a company. The latter is also called "market capitalization" and means the value of all stocks that are in circulation. Ultimately, it indicates how much an investor would have to pay to take over a company completely.

The weighting of the individual stocks can differ depending on the index. The weight of the companies in a stock index is adjusted regularly. It is important that a listed company is not weighted too much within an index. For example, the most important German share index, the Dax, has an upper limit of ten percent.

The reason: If a company receives too much weight within a stock index, a bad price of this security could disproportionately influence the overall price and possibly distort it.

What indices are there in Germany?

The leading index in Germany is the Dax. It comprises the company shares of the 30 most valuable German stock corporations and represents around 80 percent of the market capitalization of listed companies in Germany. DAX companies are about Daimler, Bayer and Allianz.

From September 2021, the Dax will grow by ten listed companies to 40 members. Until 2020, the Working Group for Equity Indices reviewed the composition of the Dax once a year, in September. This includes Deutsche Börse and banks from Germany and abroad.

Since 2021, decisions have been made twice a year as to which stock corporations should be listed in the Dax - and which should not. And further changes are coming to the Dax: From autumn 2021, when deciding on the Dax composition, the stock market turnover criterion will no longer count;

These are the other indices in the Dax family

In addition to the Dax, there is also the MDax (mid-cap index) in Germany. Cap stands for "Capitalization". Companies with a medium-sized market capitalization are referred to as "mid-caps" or "small caps". The MDax is also known as the Dax's little brother.

The MDax currently lists 60 medium-sized German companies or those active in Germany, but only 50 from autumn 2021. They follow the Dax values ​​in terms of their size - i.e. their market capitalization and stock exchange turnover. These include, for example, Zalando, Puma and Thyssenkrupp.

There is also the SDax, the so-called small-cap index. This includes 70 companies that follow the MDax companies in terms of size. These are companies such as Fielmann, Hornbach or the Ströer Group, to which t-online also belongs.

There is also the TecDax, which lists companies from the technology sector. These are, for example, Deutsche Telekom or Varta. While a company can either be listed in the Dax, MDax or SDax, it is possible that it is listed in the TecDax at the same time. For example, the software manufacturer SAP is listed in both the Dax and the TecDax.

How is a company included in the Dax?

The "Working Group for Stock Indices" decides whether a company will be included in the Dax. This committee, which consists of representatives from Deutsche Börse and various banks, takes several criteria into account.

Ten percent of the shares in a company that wants to move up to the Dax must be in free float. This means that they are not owned by one shareholder, but distributed among many investors.

You can imagine the rise of a company like the rise of a club in the Bundesliga. Because there are certain criteria - the stock market value and the trading volume - for which a certain rank must be achieved (the criterion stock market volume will, however, no longer apply from autumn 2021, see above). A company can only advance if it has been ranked at least 30th in terms of trading volume, i.e. in terms of shares traded, and 30th place in terms of market value in the past twelve months.

However, it will only be included in the Dax if there is also a company in the Dax that ranks 35th in at least one of the criteria. This company is falling accordingly - into the second division, the MDax.

If there are several candidates for promotion and relegation, the working group for equity indices decides based on the composition of the Dax. Because as many different industries as possible should be represented in the Dax.

What is the difference between the price index and the performance index?

When calculating the performance of a stock index, a distinction is made between a price index (also called a price index) and a performance index. While a price index only shows the change in share prices, a performance index also takes into account company dividends. A dividend is that part of the profit that a public company pays out to its investors.

Stock market experts often criticize the fact that a performance index like the Dax is too inflated - and so does not accurately represent the real development. You should bear this in mind when investing and also look at the development of the price index.

Price index: Well-known indices that only take into account changes in the price of the values ​​included are, for example, the American Dow Jones Industrial Index, the EuroStoxx 50 with the 50 largest European stock exchange groups or the Japanese Nikkei 225 stock index. Here, the distributions are deducted from the stock prices.

Performance index: It looks different with the German Dax. When calculating this, in addition to the price changes, the distributed dividends are also taken into account and added. The Dax cannot be compared directly with other indices.

Which stock indices are there worldwide?

Not all stock indexes are the same. There are indices that include companies from one country, several countries or the whole world according to certain criteria. In addition, there are indices that contain companies from entire industries, such as the technology sector, utilities or the health sector. Investors who only want to invest in environmentally friendly companies can, among other things, use the natural share index as a guide.

The most important stock indices worldwide are the Dow Jones Industrial Index in the USA, the Nikkei 225 in Japan and the SSE Composite in China. The following map shows the most important indices worldwide:

In addition to the country or sector indices, there are indices that contain stocks by region and track their price development. These are, for example, the EuroStoxx 50 for the euro zone or the MSCI All Country World, which contains the 2500 largest companies in the world and thus covers the entire global economy.

Since the latter unite the largest companies from different countries, economic fluctuations in individual countries can be better absorbed - at least if the entire region is not affected or if there is a global downturn.
In addition to the pure stock index, there are indices that, for example, show the performance of commodities such as crude oil or gold, or real estate.

Can I also invest in an entire stock index?

Yes, it works by investing in so-called index funds. This is a kind of basket that contains all the stocks in a certain index.

So-called exchange-traded index funds, or ETFs for short, are particularly cheap and suitable for those starting out on the stock market. These are passive funds in which a computer algorithm tracks a stock index.

There are also ETFs that replicate the Dax or the MSCI World, for example. The advantage: The risk is spread across many companies, industries and possibly even countries.

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