Whether you are one of the 55% of Americans who already invest in the stock market; or you are one of the increasing number of Germans looking to get a better long-term return on your investment / savings that a bank can traditionally offer; or even if you are just an investment enthusiast, the key to understanding equity investments (aka stocks) begins with education.
Investment terminology itself isn’t too daunting – after all, it’s essentially business terminology, and it mostly requires basic math skills – but what about exchange terminology?
For today’s example, let’s look at Germany: while the Frankfurt Stock Exchange is pretty self-explanatory, what about the most commonly used local stock index, DAX?
DAX is simply a shortened form of the words Deutscher AktienindeX, which means ‘German stock index.’ To simplify things further, an index is a listing of a certain group of stocks. Specifically, the basic DAX is a combined listing of the Prime Standard’s 30 largest German companies by book value and market capitalisation. Though not a key economic indicator itself, this particular index, with diverse component companies such as Adidas, Commerzbank, Merck, Volkswagen, and Siemens, is used to give a snapshot of overall investor sentiment relative to the German economy.
Comparatively, DAX is very similar to other indices, but, still, slightly different.
Considering that the Frankfurt Stock Exchange is one of Europe’s oldest – established in 1585 – the DAX index itself was only founded in 1988, with a base price date of December 30, 1987.
The index, like most major indices, is dynamic (instead of static), meaning that the companies that are included in it can change in order to reflect the reality of market conditions, like mergers or changing company valuations: for example, in the last 2 years, the index has adjusted to prevailing market conditions (and investor interest) by excluding 2 chemical companies – Lanxess and K+S – adding a real estate firm (Vonovia SE) as well as a mass media company (ProSiebenSat.1 Media SE).
Contrasting other global indices, there are actually 2 versions of DAX – along with the basic price index, there is also a performance index, which includes individual stock dividends into the valuation.
And the least bad news for investors, while the DAX hit a new 3-months low last Tuesday, along with France’s CAC 40, Britain’s FTSE 100, and the broad Euro Stoxx 50 index – all falling by more than 3%, the German index witnesses relatively limited losses following the crash in global stock prices and the single largest point decline in the Dow Jones Industrial Average’s history last weeks.