Share price indices are usually calculated by the stock exchange, although occasionally agencies such as central banks will compile them.
Monthly data are averages of daily quotations, quarterly and annual data are averages of monthly figures.
OECD statistics contact: email@example.com
Key statistical concept
The Main Economic Indicator share indices are targeted to be national, all-share or broad, price indices and use the closing daily values for the monthly data, normally expressed as simple arithmetic averages of the daily data. What each share price index measures is determined by its construction. A major distinction is between a price index, which measures changes in the market capitalisation of the basket of shares in the index, and a return index, which adds on to the price index the value of dividend payments (and assumes they are reinvested in the same stocks). A price index measures how the value of the stocks in the index is changing, a return index tells the investor what their “return” is, i.e. how much money they would make as a result of investing in that basket of shares. Other terms for “return” are “performance” and “accumulation”.
Other components that determine what an index measures are: Geographic coverage, Market coverage, Sector coverage, Threshold for inclusion in the basket, and Corrections for “anomalies” (e.g. splits, market consolidations). There are literally thousands of stock market indices available world-wide because indices are tailored to meet the specific needs of investors and other market observers. They may cover specific industries (e.g. engineering goods), sectors (e.g. telecom, energy or health care), whole markets (e.g. all shares indices) and may be local, national, multinational or even global. They can be calculated and distributed as frequently as on a “real-time” basis of every few minutes but are at least available on a daily basis. In recent years there has been a tendency for stock exchanges to co-operate on index methodology with major financial houses such as Standard & Poor’s, FTSE, Dow-Jones. When an agency sponsors index calculation, its name is often included in the official index name. The statistical methodologies used to calculate the indices are well developed.
The compiling agency usually makes detailed information available on its website. Links are included in the country/subject texts where available. Investment in ICT has largely eliminated the need for physical proximity for trading, and the trend is now for markets to merge cross-nationally (e.g. Euronext).
Glossary Terms: Share prices index
Recommended uses and limitations
Because a stock market’s valuation reflects investors’ confidence in it and therefore captures perceptions about its future viability, share prices indices have a strong forward-looking component. For this reason, and because the speed with which they are calculated and published means they are available immediately after the end of the reference period, they are frequently used in the construction of forward-looking indicators. Although primarily designed as measurements of market performance for use by individual investors and investment fund managers, share price indices are also used as indicators of economic activity by business and government analysts.
They also have a crucial role as a component in the construction of the CLIs series. Leading indicators are aggregate time series displaying a reasonably consistent advance relationship with a reference series measuring the economic cycle of a country, usually the index of industrial production. Will indices continue to play a significant role as economic activity indicators? As movement towards liberalization and harmonization of stock exchange activity gains momentum, trading in London may influence, say, the opening trading of the Tokyo exchange and thus the Tokyo index. Such price changes are still the result of a change in investors’ views.
This development of having a company’s stock traded on more than one exchange may well mean that the index for a country’s exchange is increasingly less reflective of that domestic economy, given the inclusion of foreign stock. Another development could be the possibility of smaller exchanges being forced out of business as the more successful, bigger exchanges enjoy an increasing share of a global market in security trading.
One viewpoint of this development may be that integration of exchange activity is proceeding alongside the integration of national economies and that each of the surviving indices could reflect to a certain degree a number of individual national economies. Or again, additional new indices may be compiled that relate not to specific exchanges as such, but to specific economies, with the basic information being obtained from more than one exchange. Such a development would involve the conversion, through the use of exchange rates, of the basic information from the national currency (on which the exchange specific indices are presently constructed) into a standard currency, say the U.S. dollar.
It is interesting to note that some ‘combined’ indices are already being computed, e.g. the FTSE International World Indices. Given that in some countries, overseas investment in certain companies is limited to specific levels, the weighting for these companies in the World Indices is restricted to correspond to the permitted maximum overseas investment.