What is a Stock Exchange and Stock Index? UK & US Perspectives

Stock Indices make it simpler to perceive companies that are on a Stock Exchange. London Stock Exchange, S&P 500, NASDAQ, FTSE 100, FTSE 250 are the notions you will hear when trading. However, what is a Stock Exchange, and what is a Stock Index?

A Stock Exchange is a Marketplace

To begin, let’s consider a Stock Exchange. A Stock Exchange is basically a marketplace for the purchasing and selling of various assets, such as shares between individuals in a controlled setting. In case a company  wishes to raise funds for its business, it can list or create an Initial Public Offering on a Stock Exchange and sell its shares to investors (e.g., retail financial specialists) and solid fund managers (e.g., institutional investors).

Stock Exchanges (marketplaces) are accessible all around the world. The London Stock Exchange is located in the UK; the New York Stock Exchange – in the US, The Euronext (comprising France, Portugal, Belgium, and the Netherlands), as well as the Australian Securities Exchange – in Australia. 

 

All will differ by the market capitalization or value according to the companies  ‘listed’ on the Exchange, however, all follow the same structure providing a place for financial instruments to be traded.

A Stock Index is a Measure of the Marketplace

Let’s take a look at a Stock Index.

A Stock Index basically separates the companies listed on a Stock Exchange – usually by a sphere or market capitalization. It is basically a presentation or measure of a section or sub-set of the Stock Exchange – making it possible to do comparisons.

You can obviously invest in companies on a Stock Exchange, but you can’t ‘trade’ the Stock Index. Notwithstanding, you can invest in the Index Funds that attempt to reflect the performance of the Index – for example, by means of investing in an Investment Fund or Exchange Traded Fund.

London Stock Exchange Encompasses a Wide Range of Indices Estimating the Value of Companies

Let’s consider the London Stock Exchange. While this is the Stock Exchange, the indices related to it are the FTSE 100, FTSE 250, FTSE 350, FTSE SmallCap, and FTSE techMARK 100.

The first four are strictly based on the market capitalization (or value) of companies. The FTSE 100 measures the 100 biggest companies on the London Stock Exchange, The FTSE 250 follows a similar rule (representing the following 250 companies) and the FTSE 350 follows the same structure reflecting a combined version of FTSE 100 and FTSE 250. The FTSE SmallCap captures the most valued companies from 351 to 619.

The FTSE teckMark100 is the initial Stock Index that estimates companies according to their sphere; for instance, technology-related companies.

North America has Stock Exchanges and Records as Well, Such as Google & Amazon

When discussing technology, it is important to consider the National Association of Securities Dealers Automated Quotations or NASDAQ in the US. This Stock Exchange functions separately from the New York Stock Exchange. It focuses on technology; for example, such tech-monsters as Amazon, Microsoft, and Google are listed on NASDAQ.

There are three major Stock Indices to pay attention to inside the US:

  • NASDAQ Composite – a selection of all the companies (more than 3000) that are listed on the NASDAQ Stock Exchange. There is also NASDAQ 100 that comprises the 100 biggest shares on NASDAQ by market capitalization.
  • Dow Jones Industrial Average – a composite of the strongest 30 shares by market capitalization on the New York Stock Exchange and NASDAQ. Its limited range implies that it is fully focused on the most noteworthy companies with minor corrections over a long time.
  • S&P 500 – a selection of the best 500 shares by market capitalization. It is known to present roughly 80% of the US Stock Market. It will highlight such giants as Amazon, Google, but will also include the companies from different sectors, for example, Healthcare, Financials, and Industrials.

It is truly valuable to comprehend the distinctive Stock Indices accessible – not just to follow the performance of shares, but also when investing in funds. They truly help to comprehend the functionality of the Stock Exchanges and guarantee you make investments adjusted to your purposes.