The main functions performed by an index are: a. providing information about the market situation or its selected segments, presented in a parameterized manner according to standardized rules (enabling the comparison of results of different indexes in an appropriate way), b. serving as a underlying instrument for derivative instruments (options, futures contracts and CFDs), c. serving as a reference point for evaluating investment effectiveness (benchmark), d. being a data source for individual investors to create statistical models in technical analysis, e. in portfolio theory analysis and analysis of different capital market models, it acts as a substitute for specific components (assets of a given type) of analyzed model portfolios such as 60/40. By analyzing changes in the index value, one can: a. evaluate the historical rate of return in a specific market, b. assess the direction of movement (trend and its strength) without analyzing the prices of individual index components (e.g. individual stocks or other instruments), c. estimate the volatility in a given market, d. estimate the profitability of the index in correlation to the level of risk (rate of return per unit of risk), e. estimate the correlation between different asset classes in specific markets, represented by the given indexes (e.g. how correlated stock prices are with the price of gold or stocks in the gold industry), f. estimate the concentration of the index (share of the largest components), consequently estimating the impact of specific risk of a given component on the index performance, or otherwise determine the degree of index diversification.
The main functions performed by an index are: a. providing information about the market situation or its selected segments, presented in a parameterized manner according to standardized rules (enabling the comparison of results of different indexes in an appropriate way), b. serving as a underlying instrument for derivative instruments (options, futures contracts and CFDs), c. serving as a reference point for evaluating investment effectiveness (benchmark), d. being a data source for individual investors to create statistical models in technical analysis, e. in portfolio theory analysis and analysis of different capital market models, it acts as a substitute for specific components (assets of a given type) of analyzed model portfolios such as 60/40. By analyzing changes in the index value, one can: a. evaluate the historical rate of return in a specific market, b. assess the direction of movement (trend and its strength) without analyzing the prices of individual index components (e.g. individual stocks or other instruments), c. estimate the volatility in a given market, d. estimate the profitability of the index in correlation to the level of risk (rate of return per unit of risk), e. estimate the correlation between different asset classes in specific markets, represented by the given indexes (e.g. how correlated stock prices are with the price of gold or stocks in the gold industry), f. estimate the concentration of the index (share of the largest components), consequently estimating the impact of specific risk of a given component on the index performance, or otherwise determine the degree of index diversification.