I just realized that many people are still confused about stock indices, what exactly an index is, and why it’s important. Let’s try to explain it clearly.

Simply put, a stock index is a number that tells us the direction of the stock market. It reflects the movement of the prices of a certain group of stocks that represent the market. For example, Thailand’s SET50 shows the changes of 50 stocks with the highest market value and good liquidity. An index is a tool that helps us better understand the market’s condition.

As for how it’s calculated, there are three popular methods. The first is weighted by market capitalization, meaning larger companies have more influence on the index. Examples include the S&P 500 in the US, FTSE 100 in the UK, and SET in Thailand.

The second method is price-weighted, where stocks with higher prices have a greater share. The Dow Jones and Nikkei 225 are clear examples of this.

The third method gives equal weight to all stocks. This spreads risk better but may change more quickly.

Let’s look at some of Thailand’s popular indices first. Besides the main SET index, there are also the SET50 and SET100, which are popular among investors. Both are updated every six months in June and December. The SET50 started on August 16, 1995, and the SET100 on April 30, 2005. Both started at 1,000 points.

For international indices, the S&P 500 in the US is one of the most traded indices in the world. It reflects the performance of 500 large companies like Apple, Microsoft, Amazon, Berkshire Hathaway, and Visa.

The Dow Jones, weighted by price, measures 30 large companies such as Microsoft, Coca-Cola, Apple, and McDonald’s, compiled by S&P Dow Jones Indices.

NASDAQ 100, established on January 31, 1985, is an index of 100 non-financial companies, including four that generate over a trillion dollars in revenue: Apple, Amazon, Microsoft, and Alphabet.

The Nikkei 225 is Japan’s index that measures 225 leading companies. It started on September 7, 1943. It’s a key indicator of Japan’s stock market and economic outlook since World War II.

The FTSE 100 is an index of 100 companies listed in London. Their stocks account for 81% of the total market value. Examples include Tesco, Unilever, and Barclays.

Germany’s DAX 30 is an index of 30 blue-chip companies weighted by market value. It’s comparable to the Dow Jones in the US. It started on July 1, 1988. Companies like BMW, Adidas, Bayer, and Deutsche Bank are included.

Understanding what an index is is the first step for investors who want to follow the market. Each index tells a different story, depending on which market you’re interested in.