Stock Index defines as financial markets from at least several (usually many) underlying individual stocks. The example of stock indices is the NASDAQ 100, the FTSE 100, the S&P 500, etc.
Stock indices classified as independent financial markets. But, to calculate the stock index, we need to also calculate the prices of their underlying individual stocks.
How Calculating Stock Index Help You Improve Your Trading?
If you calculate the stock index, you will know the value of its underlying individual stocks. Knowing the value of those stocks is the most essential part of stock trading.
For instance, if you want to trade long on BCB stock index, you can analyze the important underlying individual stocks.
If you can find individual stocks that are in agreement with long trade, you can choose that stock market index.
What are the Differences between the Direct and Indirect Stock Index Calculations?
Direct stock index calculation requires you to add all the underlying individual stock prices. For instance, if the stock index consists of 25 underlying individual stock, then, you need to add all of that 25 prices (the price of stock #1 + price of stock #2 + ….).
On the other hand, in the indirect stock calculation, after you add all of the underlying individual stock prices, you need to also divide it by the number of that individual stock and multiply it by their average trading turnover.
For instance, if the stock index has 25 underlying individual stock, then after you add of those individual stock prices, you need to divide it by 25. After that, you need to multiply the result by the average trading turnover of each underlying individual stock.
The main difference between that two calculation is on the value (like the importance, not the financial value) of underlying individual stock they provide.
In the direct calculation, all of the individual stocks get equal value. Contrarily, the indirect calculation gives different values on each underlying individual stock.
Also read: Qualities in Day Trading Stocks
