If you have been investing in the stock market, you must have pay attention to the worldwide stock market indices as well，but do you know what the index really is and what the constituents of the index are? Actually, the index is trend indicator of a basket of assets which could be designed according to stocks, commodities, regions, countries，sectors, currencies or real estates.
The index is aimed to provide investors with a representative reference for a particular type of assets. there are different reference indices used in different countries and regions. Such as the US S&P 500, the Japanese Nikkei 225, the Germany DAX index, and the Chinese Shanghai Composite Index etc. Each index has its own calculation methodology.
We use different methods to track different indices. for example, Shanghai Composite Index is calculated by all stocks listed in the stock market. Apart from calculating all stocks, some indices use only a few dozens or a few hundreds of representative stocks to constitute the indices. Standard and Poor’s 500 index is one of the examples. it is constituted of 500 stocks and the trend is determined by the stock prices. What are blue chips? As we have mentioned, some indices just use a few dozens or a few hundreds of stocks to track the respected index, take Hong Kong Hang Seng Index as an example, it is calculated by 50 representing stocks and these 50 components of the index are called the blue chip stocks The criteria of adding the stock into the index are based on the market value and turnover. equity Index will do a time to time review on the stocks and adjust the number and weighting of the stocks. for the time being In Hang Seng Index Tencent Holdings has the highest weighting percentage and followed by HSBC Holdings in Hong Kong
Different blue chip stocks have a different proportion on
As Hang Seng Index covers 70% of the market value of all listed company last year, it can be seen as a reference and also an important economic indicator, The United States has 3 major indices, the Dow Jones Industrial Average, the Nasdaq Composite Index, and the Standard & Poor’s 500 Index. S&P 500 index, which is founded by the Standard & Poor in 1957 is the second largest index after the Dow Jones Industrial Average. Compared to the other two US indices, S&P index selects 500 stocks from different US industries with the highest market value, it also includes different industries such as Apple (AAPL), Nike (NKE), and Honeywell( HON ). which people are familiar with. that is why the trend of the index is relatively stable and is representing of the overall market.
Being different from S&P 500 Index, the Shanghai Composite Index (SHA:000001) is listed on the Shanghai Stock Exchange, all listing companies are the constituent of the index, once a company is newly listed on the Shanghai Stock Exchange, the price-earnings ratio will be adjusted as well, The Shanghai Composite Index is officially announced on July 15, 1991, the base date is Dec 19, 1990, and the basis point is 100. Although Shanghai Composite Index started later than those indices in other countries, it is developing with China’s rapid growth in the economy in recent years, with the addition of the huge trading volume, many investors are taking notice of the trend of the Shanghai Composite Index. so is an equity index useful as a reference? the major function of indices is a trend to provide investors with a sense of the overall market. Of course, it cannot be ensured that all stocks will rise when indices rise. the relation is more like a pet owner and a pet the index is the owner while the stocks are the "pets". Different pets have different temperaments, some would be more active and like to run around while others might follow the pace of the owner, However, the owner always leash up their pets and eventually, the general direction and pace of the pets walk will still depend on the owners, In other words, the trend of the stock indices will eventually be affected but it may fluctuate in certain volatility. In fact, according to historic statistics, when the indices rise, 70% of stocks will follow While 90% of the stocks will follow when there is a decline. Thus, apart from selecting a good pet, watching the market trend is equally important