14 June 2024

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Financial Education: What is a Stock Index?

Luigi Campopiano

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Before delving into the specifics, let's clarify what financial education is and why it's important to nurture this aspect. According to the OECD (Organisation for Economic Co-operation and Development), financial education is defined as follows:

"Financial education is a process through which consumers, savers, and investors improve their understanding of financial products and the concepts behind them, and through instructions, information, and advice, develop skills and knowledge to understand the risks and opportunities to make informed choices, where to receive support or help to make these choices, and the actions to take to improve their condition and level of protection."

Those who think, "okay, but I don't invest and don't intend to invest in the future, so I'm not interested in delving into this aspect," should reconsider the impact money has on their life to understand if it's important to care about their financial literacy. Money might not be the most important thing in the world, but it certainly influences a large part of life. Reflecting on it, it influences:

• Lifestyle;
• Healthcare;
• Education level;
• The food you eat;
• Anything on a daily basis.

Money might not be the most important thing, but it affects everything that is important in life: it would be good to learn to take care of your financial education because a decent level of financial knowledge is necessary to make the right decisions concerning daily life. This includes, for example, managing savings, choosing a mortgage for a new house, financing a new car, or selecting the best financial tool to set aside money for children's education.

Another reason comes from a study by the Committee for the Planning and Coordination of Financial Education Activities: specifically, this research highlighted how in the pre-COVID period, over 36.6% of those interviewed did not have resources to last more than 2 months without income (they had not built up a reserve of money over time to use in times of crisis or unexpected events); moreover, 2 out of 10 families did not have financial resources to last even a month without income. This study should help understand how taking care of your financial education is fundamental and useful, especially for facing periods of crisis caused by extraordinary events, which now occur much more frequently.

After briefly discussing financial education, it's time to discover the meaning of a stock index: it is the summary of the value of a basket of stocks present in a specific stock market used to measure changes in value over time. Besides stock indices, there are also bond indices, commodity indices, and real estate market indices.

Here are the main stock indices in the world, divided by geographical areas:

Europe

• DAX30 Germany: composed of the 30 largest market capitalization stocks on the Frankfurt Stock Exchange;
• CAC40 France: composed of the 40 largest French or foreign market capitalization stocks listed on Euronext;
• IBEX35 Spain: composed of the top 35 stocks by liquidity and market capitalization listed on Spanish markets;
• FTSE MIB Italy: composed of the 40 largest Italian companies' stocks;
• FTSE-100 UK: composed of the 100 largest companies listed on the London Stock Exchange.

Asia

• NIKKEI: includes the 225 stocks of the largest 225 companies listed on the Tokyo Stock Exchange;
• HANG SENG INDEX: includes the top 50 companies listed on the Hong Kong Stock Exchange;
• SSE Composite: includes all stocks traded on the Shanghai Stock Exchange;
• CSI 300: composed of the 300 largest “A” shares by market capitalization, listed on both the Shanghai and Shenzhen Stock Exchanges.

USA

• S&P 500: Standard & Poor's 500 represents the 500 largest companies listed on U.S. stock exchanges (actually, 505 stocks are listed because some companies have multiple classes of shares on the list);
• NASDAQ 100: one of the most important indices globally, including 100 of the largest non-financial companies, both American and foreign, listed on Nasdaq;
• NASDAQ: National Association of Securities Dealers Automated Quotation, established on Wall Street in 1971, was the first entirely electronic stock exchange in the world. Over 3000 companies, many from the tech sector, are listed on NASDAQ;
• DOW JONES: Dow Jones Industrial Average is a stock index representing the performance of the top 30 stocks listed on the U.S. market. The index is not tied to any specific sector as its basket includes stocks from various productive sectors, both traditional and new economy. The selection of stocks to include or exclude from the basket is up to the editors of "The Wall Street Journal."

I'll leave you with a quote from Nelson Mandela: "Education is the great engine of personal development. It is through education that a farmer's daughter can become a doctor, a miner's son the head of the mine, or a child born in a poor family the president of a great nation. Not what we receive, but the ability to make the best use of what we have, is what distinguishes one person from another."