CFA Level 1
Securities Markets - Domestic vs. Global Indexes
An index measures the movement of a select group of stocks, based on size, industry, etc. It is also a gauge to measure the relative return on a specific stock within that index.
Domestic Stock Indexes
A domestic stock index is made up of domestic stock securities and can be based on various components such as market cap, whether it is a value or growth index and many other components. The Dow Jones Industrial Average and the S&P 500 are good examples of domestic stock indexes. The Dow Jones Industrial Average is comprised of 30 domestic stocks selected by the Wall Street Journal. The S&P 500 index contains 500 domestic stocks. To be included in the index, a company must have a minimum market cap of $4 billion, be financially viable and have a public float of at least 50%.
Global Stock Indexes
A global stock index is similar to a domestic stock index except that it is made up of both domestic and international equity securities. An example of a global index is the S&P Global 1200. The index comprises securities in 29 countries. The key component for a security to be included in a global stock index is that it is tradable. For a global investor, this is a nice gauge to measure relative return.
Bond indexes are much trickier to construct than stock indexes. Given that there are typically many bonds issued for each company, there are many times more bond issues than stock issues to choose from. A bond index thus takes a sampling to create an index. An example of a bond index is the Lehman Brothers Aggregate Bond Index, which made up of 5,545 bonds across all segments of fixed income, including corporate, treasury and mortgage-backed segments.
Composite Stock-Bond Indexes
Composite stock-bond indexes are good proxies to measure a diversified stock/bond portfolio. These composites contain both stock and bond securities. The Merrill Lynch -Wilshire U.S. Capital Markets Index is an example of a composite stock-bond index.
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