How to Choose a Stock Index: An Essential Guide for Beginner Investors

2026-01-06 11:10:01

Every morning and evening, you may see news reports mentioning the S&P 500, NASDAQ 100, Nikkei 225, or Dow Jones in economic reports. But what exactly is an index, and why is it important for your investments? This article will explain everything you need to know.

Basic Understanding: What Is a Stock Index?

An index is a measure that shows the change in prices of a selected group of stocks. For example, Thailand’s SET High Dividend 30 index reflects the movement of stock prices of 30 companies with key indicators, including high market value, good liquidity, and high dividend yields.

Classifying a stock index requires key criteria: it must be investable and publicly disclosed. Many community funds reference the SET50 and SET100 indices, which are called the combined index of the fund according to the index. The difference between a fund’s performance and the referenced index is called Tracking Error. The lower the Tracking Error, the more efficient the fund’s investment management.

How to Calculate Different Types of Stock Indices

There are three main methods to calculate an index, depending on how the weights of the included stocks are assigned.

Market Capitalization-Weighted (

In this method, stocks with larger market values have more influence on the index’s change. Examples include the S&P 500, FTSE 100, and SET.

Calculation example: The ABC index has stock X priced at 4 baht with 100 shares, and stock Y priced at 5 baht with 200 shares.

Market Cap = Stock Price × Total Shares

Stock X: 4 × 100 = 400 baht
Stock Y: 5 × 200 = 1,000 baht
Total Market Cap: 1,400 baht

Index proportion = )Market Cap of the stock ÷ Total Market Cap( × 100

Stock X: )400 ÷ 1,400( × 100 = 28.57%
Stock Y: )1,000 ÷ 1,400( × 100 = 71.43%

) Price-Weighted (

In this method, stocks with higher prices have more weight in the index. Examples include the Dow Jones and Nikkei 225.

Calculation example: The ABC index has stock X at 5 baht, stock Y at 10 baht, and stock Z at 15 baht.

Proportion = )Stock Price ÷ Sum of all stock prices### × 100

Stock X: (5 ÷ 30) × 100 = 16.67%
Stock Y: (10 ÷ 30) × 100 = 33.33%
Stock Z: (15 ÷ 30) × 100 = 50.00%

( Equal-Weighted )

All stocks have equal proportions in the index. This method diversifies risk well but may have additional risks from rapid volatility.

Popular Stock Indices in Thailand

Besides the SET, which reflects the entire market, there are other key indices:

SET50 and SET100 are indices showing the movement of the top 50 and 100 stocks, respectively, with the highest market value, stable liquidity, and shareholder composition meeting set criteria.

Calculation method: SET50/100 = (Current total market value ÷ Base total market value) × 1,000

The base date for SET50 is August 16, 1995, and for SET100, April 30, 2005. The initial value is 1,000 points. The constituent companies change every 6 months, in June and December.

Major Global Stock Indices

S&P 500 (United States)

S&P 500 is a market capitalization-weighted index of 500 large companies listed in the US stock exchanges. It is a key indicator reflecting the US economy and is widely traded.

Real companies in the index include Apple, Microsoft, Amazon, Berkshire Hathaway, and Visa.

( Dow Jones )United States###

Dow Jones or Dow Jones Industrial Index is a price-weighted index comprising 30 blue-chip US companies like Microsoft, Coca-Cola, Apple, and McDonald’s.

This index is compiled by S&P Dow Jones Indices.

( NASDAQ 100

NASDAQ 100 was launched on January 31, 1985. It is an index of 100 large non-financial companies listed on the NASDAQ stock exchange.

NASDAQ 100 includes four companies with revenues exceeding one trillion dollars: Apple, Amazon, Microsoft, and Alphabet.

) Nikkei 225 ###Japan(

Nikkei 225 is a daily index of 225 leading Japanese companies listed on the Tokyo Stock Exchange, calculated since September 7, 1943, or 70 years ago.

It is a key indicator of the Japanese stock market and the Japanese economy since World War II.

) FTSE 100 ###United Kingdom###

FTSE 100 is an index of the 100 companies with the highest market value listed on the London Stock Exchange. Companies in the FTSE 100 account for 81% of the total market value. It is compiled by FTSE Group.

Examples include Tesco, Unilever, Barclays.

( DAX 30 )Germany###

DAX 30 is a market capitalization-weighted index of 30 blue-chip German companies listed on the Frankfurt Stock Exchange. It is comparable to the Dow Jones in the US.

Due to the small number of companies, the DAX 30 may not fully reflect the German economy. It was first launched on July 1, 1988.

Examples include BMW, Adidas, Bayer, Deutsche Bank.

Summary

Stock indices come in various forms and calculation methods. Choosing the right index depends on your investment goals and risk tolerance. Whether it’s Thailand’s SET50 or the US NASDAQ 100, understanding how indices work is the first step toward informed investing.

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