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When you're studying international financial markets, stock indices are your window into understanding how economies perform, how investors behave, and how capital flows across borders. You're being tested on more than just names and numbers—exams want you to demonstrate understanding of index construction methods, regional economic significance, and cross-market relationships. These indices show up in questions about portfolio diversification, economic indicators, and global market integration.
Don't just memorize which index belongs to which country. Know why an index is weighted a certain way, what sectors drive its performance, and how it connects to broader economic health. The difference between a price-weighted and market-cap-weighted index isn't trivia—it fundamentally changes how you interpret market movements and compare performance across regions.
Price-weighted indices calculate their value based on the stock prices of component companies, meaning higher-priced stocks have more influence regardless of company size. This older methodology creates unique quirks in how these indices respond to market movements.
Compare: Dow Jones vs. Nikkei 225—both use price-weighting, but the Nikkei includes 225 companies versus just 30. This makes the Nikkei broader but still subject to the same methodological criticism: company size doesn't determine influence. If an FRQ asks about index construction limitations, these are your go-to examples.
Market-capitalization weighting assigns influence based on total company value (share price × shares outstanding), meaning the largest companies drive index performance. This methodology dominates modern index construction.
Compare: S&P 500 vs. NASDAQ Composite—both are market-cap weighted, but NASDAQ's tech concentration makes it more volatile. The S&P 500 offers sector diversification while NASDAQ reflects growth/innovation sentiment. Know this distinction for questions about sector exposure and risk.
European indices track the continent's largest economies and collectively signal Eurozone economic health. Each serves as both a national indicator and a component of broader European market analysis.
Compare: FTSE 100 vs. DAX—both are market-cap weighted European benchmarks, but FTSE 100 companies derive substantial revenue internationally while DAX companies are more tied to European and German export markets. Post-Brexit, these indices increasingly diverge in what they signal about their respective economies.
Asian indices track the world's fastest-growing major economies and increasingly influence global market sentiment. Time zone differences mean these markets often set the tone for European and American trading sessions.
Compare: Shanghai Composite vs. Hang Seng—both track Chinese economic performance, but Shanghai reflects mainland domestic markets with capital controls while Hang Seng offers international investor access. For questions about market accessibility and capital flows, this distinction is critical.
| Concept | Best Examples |
|---|---|
| Price-weighted methodology | Dow Jones Industrial Average, Nikkei 225 |
| Market-cap weighted methodology | S&P 500, NASDAQ, FTSE 100, DAX, CAC 40, SENSEX |
| Technology sector concentration | NASDAQ Composite |
| Eurozone economic indicators | DAX, CAC 40 |
| Chinese market exposure | Shanghai Composite, Hang Seng Index |
| Emerging market benchmarks | SENSEX, Shanghai Composite |
| Blue-chip/narrow composition | Dow Jones (30), SENSEX (30), DAX (40) |
| Broad market coverage | S&P 500 (500), NASDAQ (3,000+), Shanghai Composite (all listed) |
Which two major indices use price-weighting, and what limitation does this methodology create when comparing company influence?
If you wanted exposure to U.S. technology companies specifically, which index would serve as the best proxy—and why might this concentration increase portfolio risk?
Compare and contrast the Shanghai Composite and Hang Seng Index: how do they differ in terms of investor accessibility and what each signals about Chinese economic performance?
An FRQ asks you to explain why the FTSE 100 might not accurately reflect UK domestic economic conditions. What characteristic of its component companies would you cite?
Which European index is considered the primary bellwether for Eurozone economic health, and what sector composition makes it particularly sensitive to global trade conditions?