More and more people are talking about the SET50, NASDAQ 100, and the Dow Jones in economic news—but what exactly is an index, and why is it important?

Put simply, an index is a number that tells us which direction the prices of a group of stocks are moving. For example, the SET High Dividend 30 index reflects the prices of 30 companies with high market value, good liquidity, and high dividends. Instead of tracking each individual stock, looking at an index is the fastest way.

Why use an index? Because it must be truly investable, transparent, and reliable. There are plenty of index funds, such as SET50 and SET100, which people commonly use as references. The lower the tracking error (the difference between the fund’s performance and the index), the better.

As for index calculation, there are three main methods.

First is a market-capitalization-weighted stock index. Large companies with a higher Market Cap have more influence on the index than smaller ones. For example, think about the S&P 500, the FTSE 100, and Thailand’s SET. Imagine Stock A costs 4 baht for 100 shares (Market Cap 400), and Stock B costs 5 baht for 200 shares (Market Cap 1,000). If the total Market Cap is 1,400 baht, then Stock A makes up 28.57% of the index, while Stock B makes up 71.43%—because Stock B has the higher Market Cap.

Second is a price-weighted stock index. Stocks with higher prices have a larger proportion. Examples include the Dow Jones and Nikkei 225. If Stock A costs 5 baht, Stock B costs 10 baht, and Stock C costs 15 baht, then Stock C accounts for 50% of the index, Stock B for 33.33%, and Stock A for 16.67%.

Third is an equally weighted stock index. Every stock has the same proportion. The good thing is that it spreads risk well, but it may change quickly.

When it comes to popular indices in Thailand, besides the general SET, there are also SET50 and SET100. These show the stock prices of the first 50 and 100 companies, respectively, with the highest Market Cap, good liquidity, and retail shareholder criteria. The calculation uses the total market value on the current day divided by the total market value on the base day, multiplied by 1,000. The base date for SET50 is 16 August 2538, while for SET100 it is 30 April 2548. Both update the company list every 6 months, in June and December.

Internationally, there are many as well. The S&P 500 is an index of 500 US companies, weighted by market value, representing the US economy. It includes companies such as Apple, Microsoft, Amazon, Berkshire Hathaway, and Visa.

The Dow Jones is an index of 30 large US companies, weighted by price. Companies such as Microsoft, Coca Cola, Apple, and McDonald are included, compiled by S&P Dow Jones Indices.

NASDAQ 100, since 31 January 2528, is an index of 100 large (not financial institutions) companies in the NASDAQ market. It consists of the 100 largest non-bank companies. This is where four companies are based whose revenues reached the trillion-dollar mark: Apple, Amazon, Microsoft, and Alphabet.

Nikkei 225 of Japan is calculated daily. It measures the performance of 225 leading Japanese companies listed on the Tokyo Stock Exchange. The Nikkei newspaper publishes it. It has been published since 7 September 2493—more than 70 years—and it is an indicator of the Japanese stock market and the Japanese economy after World War II.

FTSE 100 is an index of the 100 companies with the highest Market Cap listed on the London Stock Exchange. Stocks in the FTSE 100 account for 81% of the total market value. It is used to measure the UK stock market. FTSE Group, a company under the London Stock Exchange, compiles it. Companies include Tesco, Unilever, and Barclays.

DAX 30 is an index of 30 German blue-chip companies, weighted by market value, listed on the Frankfurt Stock Exchange. It is equivalent to the Dow Jones of the United States, but because it includes fewer companies, it cannot reflect the German economy fully. First published on 1 July 2538. Companies include BMW, Adidas, Bayer, and Deutsche Bank.