Financial Indices and their importance in personal finances

When talking about the world of finance, it is often heard in the media that the “markets” rose, fell or had some event that generated some reaction in the prices of the shares that are listed in them, but what does this mean? and how does it affect people’s finances?

In order to answer this question, it is first necessary to define how the value of a financial market as a whole is measured and what that value means.

The measurement of financial markets, whether in local markets or in other countries, can be done by calculating a financial index which regularly has a defined calculation methodology, either by weighting its components through their price, market capitalization value (company value) or by a weighting that is the same for each of the companies that make up said index. Once you have the value calculated with companies of interest, you can use this index to have greater visibility of how the market or a subset of it behaved due to the movement of this data.

In the case of the Mexican market, the most relevant indicator for the country is that of the Mexican Stock Exchange, which is called the Price and Quotation Index (IPC); which measures how the 35 most liquid companies in the Mexican market behaved as a whole.

The media also present other financial indices such as the S & P500 or the Dow Jones, both for the United States, the STOXX 600 for Europe or the Nikkei 225 for Japan, although these are some of the examples of financial indices that can be found, there are many more that may differ in their origin or type of market (variable income, fixed income, among others); However, the objective of all of them at the end of the day is to be able to have some statistical measure of the behavior of a financial market as a whole.

Having defined what financial indices are, the question how does the fact that they have daily variations in their value affect personal finances? It can be answered that, in principle, these indicators can give an idea of ​​how an economy is developing in “real time, since these indicators always have almost immediate reactions or” discount “in their value global events that could have effects within the economy of a country, either directly or indirectly; for example, the reaction that the United States had in its indexes to the financial crisis of 2008 and how this incident had an impact on the Mexican economy and the reaction that the indexes had to this situation.

Indices can also represent a long-term investment opportunity with the help of financial instruments that are stipulated within their investment objective to replicate their value. These instruments can be ETFs or index investment funds, which can be quite attractive investment options for those who are beginning to enter the financial world and seek attractive returns, with the benefit of being able to diversify their investment portfolios just by buying a financial instrument. which, in turn, replicates the behavior of portfolios with hundreds or sometimes even thousands of companies that comprise them.

Indices can be quite useful tools for monitoring an economy and its development in addition to other indicators that are fundamentally used for such analysis, such as interest rates, the GDP of an economy, points of view and monetary policy plans of the central banks and the actions taken by the governments of each geography for public spending that can generate opportunities for all those who invest in financial markets.

*El autor es associate derivative & ETF’s trade support.

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