Editor’s Note: I recently received the following question from a gentleman named Arthur, about the meaning of the stock exchange index numbers. ~Tim McMahon, editor
Mr. McMahon,
I must say I appreciate the updates you send me each day, but I do have question regarding the world markets. What do these figures entail?
- Dow 13,232.62
- FTSE 100 5,861.922
- CAC 40 3,475.406.13
- DAX 7,335.67
- Hang Seng 21,821.875,
- Nikkei 8,946.8+18.58
- ASX 100 4,479.90
I used to think the greater the economy size, the greater the index, or maybe the indices are driven up by the value of the currency, but none of my guesses apply with what I see, what makes the Hang Seng Index so high whilst the Hong Kong Economy is tiny when compared to the US economy, yet the US currency is greater in value by far than the HK Dollar,
Also why is the Japanese Yen so low when the country has been until 2010 the Asian economic Power Horse?
Arthur
My Response:
Arthur,
Good question. Unfortunately, the index doesn’t really relate to anything except itself.
By that I mean, how can the Dow be 13,000, the NASDAQ be 3,000 and the NYSE be 8,000? When they are all U.S. stocks? The Dow only represents 30 stocks and the NYSE represents 2,500 – 3,000 but the Dow is a bigger number?
According to Wikipedia:
NYSE Composite Index
In the mid-1960s, the NYSE Composite Index (NYSE: NYA) was created, with a base value of 50 points equal to the 1965 yearly close. This was done to reflect the value of all stocks trading at the exchange instead of just the 30 stocks included in the Dow Jones Industrial Average. To raise the profile of the composite index, in 2003 the NYSE set its new base value of 5,000 points equal to the 2002 yearly close.
So the index number is 100% arbitrary… they can set the start equal to anything they want and even change it if they think it will give them a competitive advantage. Just like the Consumer Price Index (CPI-U). The government chose an arbitrary date to be the base year and set that equal to 100. Currently that date is 1984. (Or more accurately the average of the years 1982-1984) previously the base year was 1967.
Hope this Helps,
Tim McMahon, Editor
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