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

Stock Indices make it easier to understand companies that are on a Stock Exchange. London Stock Exchange, S&P 500, NASDAQ, FTSE 100, FTSE 250 are all terms you will hear when investing. But which is a Stock Exchange and which is a Stock Index?

A Stock Exchange is a marketplace

Firstly, let’s look at a Stock Exchange. A Stock Exchange is essentially a marketplace for the buying and selling of shares and other financial instruments between people in a regulated environment. If a company wants to raise money for its business, it can list or conduct an Initial Public Offering on a Stock Exchange and sell its shares to the public (retail investors) and big asset managers and pension fund managers (institutional investors).

Stock Exchanges (essentially marketplaces) are available globally. The London Stock Exchange is within the UK, The New York Stock Exchange in the US, The Euronext (covering France, Portugal, Belgium and the Netherlands) and the Australian Securities Exchange in Australian.

All will differ in terms of the market capitalisation or value in terms of the companies that are ‘listed’ on the Exchange, but all follow the same premise – a place for shares and financial instruments to be bought and sold.

A Stock Index is a measure of the marketplace

Now, a Stock Index.

A Stock Index essentially breaks down those companies or financial instruments listed on a Stock Exchange – typically by sector or market capitalisation. It is essentially a presentation or measure of a part or sub-set of the Stock Exchange – allowing for comparisons to be made.

Whilst you can invest in companies on a Stock Exchange, you can’t ‘invest’ in a Stock Index. However, you can invest in Index Funds that try to mirror the performance of the Index – such as via an Investment Fund or Exchange Traded Fund.

London Stock Exchange has many indices: measuring the value of companies

Considering the London Stock Exchange. This is the Stock Exchange. However, the Indicies associated with it are the FTSE 100, FTSE 250, FTSE 350, FTSE SmallCap and FTSE techMARK 100.

The first four are firmly based on the market capitalisation (or value) of companies. The FTSE 100 measures or represents the 100 largest companies on the London Stock Exchange, The FTSE 250 the same principle (but the next 250 companies) and the FTSE 350 follows a similar theme (FTSE 100 and FTSE 250 combined). The FTSE SmallCap then represents the highest valued companies from 351 to 619.

The FTSE techMark 100 is the first example of a Stock Index measuring companies on their basis of their sector – in this case technology-related companies listed on the London Stock Exchange.

North America has Stock Exchanges and indices too….Hello Google & Amazon

Speaking of technology, it is worth understanding the National Association of Securities Dealers Automated Quotations or NASDAQ in the US. This is a separate Stock Exchange to the New York Stock Exchange. It has a heavy technology focus – technology giants such as Amazon, Microsoft and Google are all listed on here.

Within the US, there’s three main Stock Indices to look out for:

  • NASDAQ Composite – a measure of all the companies (over 3000) that are listed on the NASDAQ Stock Exchange. There is also the NASDAQ 100 which measures the 100 largest shares on NASDAQ by market capitalisation.
  • Dow Jones Industrial Average – a measure of the top 30 shares by market capitalisation across the New York Stock Exchange and NASDAQ. It’s small selection means it is fully-focused on measuring the very highest valued companies with minor amendments over the years.
  • S&P 500 – a measure of the top 500 shares by market capitalisation. It is known to represent approximately 80% of the US Stock Market. It will feature heavyweights such as Amazon, Google but show those companies with the highest market capitalisation from other sectors such as Healthcare, Financials and Industrials.

It is really useful to understand the different Stock Indices available – not only to track the performance of shares but also when buying funds. They really do help to simplify Stock Exchanges and ensure you make investments aligned to your goals.

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