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What is a price-weighted index?

When creating an index, it must be decided what criteria will affect the value of the index, and in the case of a price-weighted index, the only consideration is the price of shares. A price-weighted index is created by adding up the individual price per share of the companies included in the index and dividing by the number of companies. Essentially what you've done is arrived at the average price per share of the companies included in the index. Continue reading...

What is the Wilshire 5000 Index?

The Wilshire 5000 is about as broad as an index gets. There are over 9,000 companies traded on all of the U.S. equity markets, and the Wilshire 5000 tries to capture a broad sense for how they are performing. Though the index says 5000, there are actually just under 7,000 listed stocks in the index. It is a cap-weighted index meaning bigger stocks have more influence, and vice versa. It can be considered the broadest index of all U.S. equity markets. Continue reading...

What is the S&P 500?

The S&P 500 (also known as the Standard & Poor's 500) is an index of the 500 largest and most important U.S. companies (selected by a special committee). The S&P 500 is a cap-weighted index, meaning the respective weights of companies in the index depends on market capitalization. For example, since Apple Inc. and Google are the biggest companies in the U.S., they affect movements in the S&P 500 more than a smaller company, like Visa. Continue reading...

What is the Dow Jones Industrial Average?

The Dow Jones Industrial Average (DJIA) is an index comprised of 30 'significant' U.S. stocks, typically the biggest and most frequently traded. The Dow Jones Industrial Average was created in 1896 by Charles Dow, as a way to track the general trend of U.S. stocks. The index is price-weighted versus cap-weighted, meaning that if a company splits 2 for 1 its contribution to the index will drop by half (even though the company's value did not change). Continue reading...

What is the Nikkei 225?

The “Nikkei” is the most referenced index for measuring Japanese stocks. The Nikkei 225 - often just referred to as “the Nikkei” - is an index that tracks the performance of Japan’s top 225 publicly-traded companies on the Tokyo Stock Exchange. It is to Japan what the Dow Jones Industrial Average is to the United States. The Nikkei is a price-weighted index. What is a Bear Straddle? What is Foreign Exchange? Continue reading...

What is the Russell 1000?

The Russell 1000 is considered the optimal benchmark for large cap U.S. stocks. The Russell 1000 comprises over 90% of the total market capitalization of U.S. stocks, and is the go-to benchmark for large cap U.S. stocks. Like the S&P 500, the Russell 1000 is cap-weighted and will give investors a good idea of how the largest U.S. companies are performing. What is the Russell 2000 Index? What Should I Compare the Performance of My Portfolio With? Continue reading...

What is the DAX?

The DAX is an index tracking performance of German stocks. The DAX is an index that tracks the 30 largest capitalization stocks that trade on the Frankfurt Stock Exchange in Germany. The index is capitalization weighted, but since it is so narrow it is more comparable to the Dow Jones than the S&P 500. It does not necessarily give a thorough indication of how the German economy is performing. What is the CAC 40 Index? What is the EURO STOXX 50? Continue reading...

What is Weighted Average Market Capitalization?

Indexes track markets in different ways, and Weighted Average Market Capitalization is a method which gives market cap, or the cumulative value of outstanding shares for a company, greater weight. Market Capitalization is the sum total value of all outstanding shares and is one way to judge the size of a company or at least its size in the market. Indexes such as the S&P 500 are Cap-Weighted indexes, which means they give greater emphasis the to the largest companies, and the dramatic price movements of only a few of the largest companies would mean that the index would swing disproportionately for large-cap companies. Continue reading...

What Is Market Capitalization?

Market capitalization is a measure of a company’s size, in terms of the value of its total outstanding shares. Most readers have probably heard of large-cap, mid-cap, and small-cap stocks. These classifications are based on the market capitalization of a company, which is defined as the number of a company's outstanding shares multiplied by the price of one share. For example, if company ABC issued 1,000 shares and it is trading at $10/share, then the market capitalization of company ABC is 1,000 x 10 = $10,000. The largest company by market capitalization as of the time of this writing is Apple Inc. Its market capitalization exceeds $750 billion. Continue reading...

What is Weighted Average?

A weighted average is a calculation considers the relative importance or relevance of a piece of data. Weighted averages multiply numbers in the average by a predetermined factor, like time, that enhances the relevance given to the number. One example of a weighted average is the Exponential Moving Average (EMA), an alternative to the Simple Moving Average (SMA) line which gives greater weight to the more recent data. SMAs are effective in their simplicity, but their efficacy is most closely tied to how they are used. Continue reading...

What are Risk-Weighted Assets?

International banking regulations set forth in the Basel Accords require that institutions maintain a certain amount of capital relative to the amount of risk-weighted assets (RWA) they have. Conservative investments such a treasury notes have a risk weighting of zero, while corporate bonds have a weighting of .20, and so forth. The exact weighting system is laid out in Basel agreements. The system is designed to reveal a bank’s level of exposure to potential losses, and the capital requirements are there to balance out the risks and to protect the global economy from a meltdown in the financial system. Continue reading...

What is Volume Weighted Average Price (VWAP)?

The Volume Weighted Average Price (VWAP) helps traders consider the influence of volume on prices. VWAP is calculated by taking the average of prices from a time period and dividing it by the trading volume for the current day. Traders use VWAP to confirm trends and decide whether to take long or short positions, while large institutions are likely to use VWAP to avoid disrupting market prices, finding the liquid and illiquid price points and trading so as not to move prices away from the averages. Continue reading...

What is a market index?

Market indexes attempt to give an overall picture of the behavior of the market by tracking the performance of a representative sample of stocks. Different indexes have different focuses. The Russell 3000 samples more of the smaller companies than the S&P 500. Index mutual funds and ETFs track specific indexes but, as you’ll notice in their disclosures, it is impossible to invest directly in an index; they only follow the index by investing in as many of the companies as possible and minimizing lag as much as they can. Indexes give numerical values for the progressive fluctuations in the price action for specific sets of stocks. Continue reading...

What is the MSCI ACWI Index?

The MSCI ACWI is the “All Country World Index” - providing the broadest measure for global stocks. The MSCI ACWI tracks performance of stocks from all over the world - literally. It includes all markets and gives the broadest picture for how world stocks are performing. Developed markets account for some 75% of total global output, so the MSCI ACWI includes many countries that are not necessarily palatable contributors to world growth. Continue reading...

What are index futures?

Index futures are futures contracts written on an index in which a large position can be held with a relatively small margin requirement. Index futures can be used for hedging or speculation. A "good faith" initial margin deposit (also called a performance bond) of a fraction of the contract size is all that is required to hold a substantial position, with a notional value worth significantly more than the amount invested. Continue reading...

What is index investing?

The main idea behind index investing is that markets are efficient, and, especially with the low fees of indexed funds, it can be a winning strategy. Index investing is a simple strategy of choosing the indices which reflect your investment beliefs and offer diversification, buying mutual funds or ETFs that track these indices, and holding them for a long period of time. The last 10 years have seen the propagation of index funds for any specific market, industry, country, commodity, etc. Continue reading...

What is Exponential Moving Average?

Moving averages are important components of many technical indicators. The Exponential Moving Average (EMA) uses the closing prices of all the previous trading days for a given interval to calculate an average price from that for the period, but is weighted to give the most recent days more influence over the final number. The weighted averages are plotted in a line that helps traders follow trends. Continue reading...

What is an Active Index Fund?

Most index funds are known for using a completely passive strategy to track an index, but some take a more active approach. Some mutual funds track an index by passively using algorithms to buy the shares necessary to build a portfolio which closely replicates an index. Such a fund will have low turnover, will only rebalance slightly based on the market cap or other criteria set forth in the prospectus, and will basically ride out all of the ups and downs of the index in a blind faith for the efficient market hypothesis. Continue reading...

What is the Advance/Decline Divergence Oscillator?

The advance/decline divergence oscillator (also called the McClellan Oscillator after its creators) tracks the rate of change in the advance-decline line (net advances). The AD line is formed from the Net Advances/Declines calculated daily at market close; this represents the proportion of stocks which advanced (increased) in price that day versus those which declined – the size of the difference is called the daily breadth. The advance/decline divergence oscillator can be applied to any group of stocks or exchange. Continue reading...

What are currency warrants?

Currency warrants are relatively new to the international Forex market. They function like puts or calls, depending on whether it is a purchase warrant or a warrant to sell, but they have longer durations, usually between one and five years until they expire. They can be purchased to take a position on a currency index or on a currency pair. Warrants were originally issued by corporations, giving investors the ability to redeem the warrant like a call option to purchase a stock at a strike price. Continue reading...