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8.4.4 International Market Indexes And Averages

This section provides a comprehensive understanding of various international market indexes and averages, which are crucial for investors looking to diversify their portfolios globally.

Introduction

As the economy becomes more global, it makes sense for investors to diversify their equity portfolios by investing not only in various industries and stocks but also in different countries. As the economies of more and more countries mature, their equity markets grow in size and sophistication, making it easier for foreign investors to enter.

Prominent International Market Indexes

Most funds that invest outside Canada prefer the large, liquid global stock markets. Some of the most noted global stock markets and their indexes include:

Nikkei Stock Average

This is the Tokyo Stock Exchange average. It is calculated in a manner similar to the Dow Jones (225) Price Index average and is updated every 15 seconds. The index is well-known both inside and outside Japan.

FTSE 100 Index

This index consists of the 100 largest listed companies on the London Stock Exchange and is one of the most widely followed indexes in the United Kingdom. It is calculated using the market capitalization of the stocks and is recalculated on a minute-by-minute basis.

DAX Performance Index

The DAX consists of 30 major Frankfurt Stock Exchange blue-chip stocks and is the most widely followed index on the German securities market. The index is weighted by market capitalization, and dividends and income from subscription rights are reinvested into the index.

CAC 40 Index

The CAC 40 Index is based on 40 of the largest 100 companies listed on the Paris Stock Exchange. It is calculated on a market capitalization basis.

Swiss Market Index (SMI)

The Swiss Market Index (SMI) is Switzerland’s blue-chip index, making it the most important in the country. The index comprises 20 of the largest and most liquid stocks on the Swiss market, ranked by market capitalization.

Emerging and Riskier Markets

In the past 25 years, interest has developed in riskier, more exotic markets such as those in China, India, Turkey, Sri Lanka, Taiwan, Korea, and Mexico, which also have their own unique stock indexes.

Key Terms & Definitions

Nikkei Stock Average: A stock market index for the Tokyo Stock Exchange, similar to the Dow Jones Industrial Average in the United States.

FTSE 100 Index: A share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

DAX Performance Index: A stock market index consisting of 30 major German companies trading on the Frankfurt Stock Exchange.

CAC 40 Index: A benchmark French stock market index representing the 40 largest companies on the Paris Stock Exchange.

Swiss Market Index (SMI): An index of the 20 largest and most liquid companies traded on the Swiss Exchange.

Key Takeaways

  • Diversifying equity portfolios by investing in different countries helps mitigate risk and potentially increases returns.
  • Prominent international market indexes include the Nikkei, FTSE 100, DAX, CAC 40, and SMI.
  • Emerging markets offer growth potential but also come with increased risk.
  • Understanding the index methodologies, market capitalizations, and specific characteristics of international indexes is crucial for informed investment decisions.

Frequently Asked Questions (FAQs)

Q: Why should investors consider investing globally?

A: Global investments provide diversification, access to growing markets, and reduced risk by spreading investments across various international economies.

Q: How is the FTSE 100 Index calculated?

A: The FTSE 100 Index is calculated using the market capitalization of its constituent companies, which are recalculated on a minute-by-minute basis.

Q: What defines a “blue-chip” stock?

A: “Blue-chip” stocks are large, reputable, and financially sound companies that are leaders in their respective industries.

Q: What are the risks associated with investing in emerging markets?

A: Emerging markets can exhibit higher volatility, political risk, and lesser regulatory standards, which can lead to greater investment risk.

Charts & Diagrams

    graph TD
	    A[International Market Indexes]
	    A --> B[Established Markets]
	    A --> C[Emerging Markets]
	    
	    B --> D[FDax]
	    B --> E[Nikkei]
	    B --> F[FTSE 100]
	    B --> G[CAC 40]
	    B --> H[SMI]
	    
	    C --> I[China]
	    C --> J[India]
	    C --> K[Turkey]
	    C --> L[Sri Lanka]
	    C --> M[Taiwan]
	    C --> N[Korea]
	    C --> O[Mexico]

📚✨ Quiz Time! ✨📚

🧐 Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! You’ll find 10 carefully curated quizzes designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you’re on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

Good luck! 🍀💪

## Which index is calculated similarly to the Dow Jones Price Index and is updated every 15 seconds? - [ ] FTSE 100 Index - [x] Nikkei Stock Average - [ ] DAX Performance Index - [ ] CAC 40 Index > **Explanation:** The Nikkei Stock Average, similar to the Dow Jones Price Index, is calculated and updated every 15 seconds, making it a well-known index inside and outside Japan. ## Which index consists of the 100 largest companies listed on the London Stock Exchange? - [x] FTSE 100 Index - [ ] DAX Performance Index - [ ] CAC 40 Index - [ ] Swiss Market Index > **Explanation:** The FTSE 100 Index consists of the 100 largest companies listed on the London Stock Exchange and is calculated using market capitalization. ## What does the DAX Performance Index represent? - [ ] 40 largest companies on the Paris Stock Exchange - [x] 30 major Frankfurt Stock Exchange blue-chip stocks - [ ] 20 largest stocks on the Swiss market - [ ] 100 largest listed companies on the London Stock Exchange > **Explanation:** The DAX Performance Index consists of 30 major blue-chip stocks from the Frankfurt Stock Exchange, and is widely followed in Germany. ## Which index is based on the market capitalization of 40 of the largest companies listed on the Paris Stock Exchange? - [ ] FTSE 100 Index - [ ] DAX Performance Index - [x] CAC 40 Index - [ ] Swiss Market Index > **Explanation:** The CAC 40 Index is based on 40 of the largest companies listed on the Paris Stock Exchange and is calculated on a market capitalization basis. ## What is the main stock index of Switzerland composed of? - [x] 20 of the largest and most liquid stocks - [ ] 30 Frankfurt Stock Exchange blue-chip stocks - [ ] 40 of the largest companies on the Paris Stock Exchange - [ ] 100 largest companies on the London Stock Exchange > **Explanation:** The Swiss Market Index (SMI) is made up of 20 of the largest and most liquid stocks on the Swiss market. ## Which markets have attracted interest for their riskier and more exotic investments in the past 25 years? - [ ] United Kingdom and Germany - [x] China, India, Turkey, Sri Lanka, Taiwan, Korea, and Mexico - [ ] Japan and Switzerland - [ ] Canada and the United Kingdom > **Explanation:** In the past 25 years, markets such as China, India, Turkey, Sri Lanka, Taiwan, Korea, and Mexico have attracted interest due to their riskier, more exotic investment opportunities. ## What does the FTSE 100 Index measure? - [x] The market capitalization of the 100 largest listed companies on the London Stock Exchange. - [ ] The top 225 companies in Japan. - [ ] The 30 major stocks in Germany. - [ ] The 20 largest stocks in Switzerland. > **Explanation:** The FTSE 100 Index is calculated using the market capitalization of the 100 largest companies listed on the London Stock Exchange. ## Which index reinvests dividends and income from subscription rights? - [x] DAX Performance Index - [ ] Nikkei Stock Average - [ ] CAC 40 Index - [ ] Swiss Market Index > **Explanation:** The DAX Performance Index reinvests dividends and income from subscription rights in the index. ## What is the Nikkei Stock Average known for internationally? - [x] Being updated every 15 seconds and calculated similarly to the Dow Jones Price Index. - [ ] Comprising the largest companies in Switzerland. - [ ] Representing the 100 largest companies in the UK. - [ ] Including 40 large companies on the Paris Stock Exchange. > **Explanation:** The Nikkei Stock Average is known both inside and outside Japan for being updated every 15 seconds and being calculated similarly to the Dow Jones Price Index. ## Why do most funds that invest outside of Canada prefer liquid global stock markets? - [ ] They avoid diversifying across different industries and stocks. - [x] They provide easier access and flexibility for foreign investors. - [ ] They only cover stocks in developing countries. - [ ] Their indexes are not updated frequently. > **Explanation:** Most funds prefer liquid global stock markets because they provide easier access and flexibility for foreign investors, allowing them to diversify their equity portfolios by investing in mature and sophisticated markets.

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Saturday, July 13, 2024