What are Global Indices
You must have surely heard the names of some of the most popular global indices like the Dow Jones, FTSE, DAX, CAC, Nikkei, Nifty, Sensex, etc. Do you know what is common to all these names? They are major global indices of stock markets. What are global indices and what do these global indices represent?
Global indices are a benchmark to evaluate the strength or weakness in the overall market. Normally, a sample of highly liquid and valuable stocks from the universe of listed stocks is selected and made into an index. The weighted movement of these sets of stocks or portfolios of stocks constitutes the movement of global indices. So, if global indices are moving up that means the markets are strong and if global indices are moving lower that means global markets are weak. In this section, we look at global indices and also at global indices market.
Understand Global Indices
You can understand global indices as a hypothetical portfolio of investment holdings that represents a segment of the financial market or the global indices market. The calculation of the index value is derived from the prices of the underlying stocks or assets in the index. Remember, the global indices market consists of stocks, bonds, commodities, etc. Here we will focus more on the global indices market for stocks. There are different ways in which indices can be weighted. For example, in the global indices market, their indices are based on market-cap weighting, revenue-weighting, float-weighting, and fundamental-weighting. Most of the leading global indices in the world typically tend to be market cap and free-float weighted.
Globally, different indices are followed by investors. In the US, the three most popular stock indexes for tracking the performance of the US market are the Dow Jones Industrial Average (DJIA), S&P 500, and NASDAQ Composite Index. The NASDAQ is the OTC market that trades in high technology sectors like IT, e-commerce, biotechnology, etc. Similarly, in bond markets, Bloomberg Barclays is a leading provider of market indexes with the Bloomberg Barclays U.S. Aggregate Bond Index being a popular benchmark. You cannot directly invest in an index so we use proxies like index funds, index ETFs and index futures but we will come back to that later.
We can quickly summarize our understanding of global indices as under:
- Global indices provide a broad representative portfolio of investment holdings of an asset class.
- Methodologies for constructing global indices vary but most of the indexes are based on market cap weighting and free float weighting
- Global indices act as benchmarks to gauge the performance of market segments and also as a barometer of the economic robustness
- More importantly, indexes can be used as a proxy for a passive portfolio in the form of index funds or index ETFs
A quick word on the methodology of global indices
Global indices have their method for calculating the index value that is based on the method approved by their index committee. Weighted average mathematics is primarily the basis for all index calculations. Many indices started as price-weighted indices but eventually shifted to becoming market-cap-weighted to ensure that smaller stocks do not exert an inordinate impact on indices. Similarly, in the modern-day, most of the indices are also free-float weighted. That means while calculating the market cap for weighting, the market cap of the promoter holdings is excluded to give a more precise picture. One argument is that market-cap-weighted indices will be vulnerable to the changes in the price of the largest stocks, but that is the way it should be.
Major Global Indices
Here are some of the most popular and tracked indices in the world. These are the general indices that give an overall view of the market and also economic robustness.
|Index Name||Country||Last Value|
|Global Dow Realtime USD||United States||4,028|
|Global Dow Realtime EUR||Europe||3,202|
|S&P 500 Index||United States||4,352|
|ASX All Ordinaries Index||Australia||7,587|
|Hang Seng Index||Hong Kong||28,310|
|S&P BSE Sensex Index||India||52,485|
|JSX Composite Index||Indonesia||6,023|
|NIKKEI 225 Index||Japan||28,783|
|FTSE Bursa Malaysia KLCI||Malaysia||1,533|
|KOSPI Composite Index||South Korea||3,282.00|
|CAC 40 Index||France||6,553|
|Amsterdam AEX Index||Netherlands||733.55|
|Oslo Exchange Benchmark Index_GI||Norway||1,137.00|
|Dow Jones Portugal Index EUR||Portugal||138.21|
|BIST 100 Index||Turkey||1,377|
|FTSE 100 Index||United Kingdom||7,123|
|Tel Aviv 125 Index||Israel||1,766|
Data Source: Bloomberg
How do Global Indices Affect the Indian Stock Market?
Do global indices affect Indian indices at all? You would find that it rarely happens that the Dow and NASDAQ are 2% up and Nifty is 2% down. It also does not happen the other way round. There is a clear correlation between the global indices and the Indian indices. The question is why does this correlation come about in the case of global indices? There are several reasons the global indices impact Indian indices.
- Post globalization, the Indian stock market is more integrated with the global market and its effects are visible. In a way, the movement in Indian indices tends to be in sympathy with the global trend.
- Quite often, the foreign portfolio investors are common across markets and their decisions to buy or sell tend to be synchronized. So, a big loss in NASDAQ may force them to take profits out of other markets too.
- An extension of the previous argument is that such FPI decisions impact the flow of foreign capital into India, which has an oversized impact on the Indian indices and also the Indian currency overall.
- Exports are another important reason. For example, heavyweights like banks tend to react to Fed decisions on tightening and loosening. Indian oil companies react to global Brent Crude prices and the impact is uniform globally. Thirdly, the sectors like IT and auto ancillaries rely heavily on US investments and US corporate spending. Thus, the relationship between Indian indices and global indices become very close.
- Finally, there is an emerging market link. Large index funds and ETFs globally look at emerging markets like India, Taiwan, Korea, Brazil, Indonesia, etc as an asset class. They base their index investment decisions, normally on the weights assigned by the MSCI EM Indices. That is why indices in emerging markets also tend to get synchronized.
Frequently Asked Questions Expand All
Most websites like CNBC, Forbes, MarketWatch etc provide real time feeds to track global markets. These are updated with respect to real time rates and returns over different time frames. Today, it is also possible to download the app and track these indices real time on mobile apps. It is a lot simpler too.
Yes you can invest in global markets in a number of ways. It is possible to invest directly in global equities using the $250,000 limit provided for annual outward investment to resident Indians by the RBI. You can also invest in global ETFs that are offered by Indian mutual funds using the Fund of Funds route. For direct global investing, you can directly approach an international broker like Schwab or Ameritrade or you can even go through Indian brokers who facilitate international transactions.