What you will learn in this lesson: in this lesson you will learn exactly what a "stock index" measures, why some of the world's major indices are calculated from each share's price while others are calculated from each company's total market value, you will meet a few widely followed global indices and currency pairs, and you will see the channels through which their gains or losses reach Iran's market.
Definitions
A stock exchange is an organized marketplace where the shares of listed companies are bought and sold; you saw its mechanics (buy and sell orders, price discovery, buy and sell queues) on the Tehran Stock Exchange in the lesson Tehran Stock Exchange 101. The world's big exchanges (New York, Nasdaq, London, Tokyo, Frankfurt) run on the same logic; only the currency, trading hours and listing rules differ.
An index is a single number that summarizes the price movement of a group of shares; instead of tracking hundreds or thousands of individual tickers one by one, an investor can glance at one index and see how "the whole market" or "a slice of the market" moved today. Each index is defined and calculated daily by a financial entity, an exchange, an index provider, or a financial news publisher.
Price weighting means a company's influence on the index number depends only on its per share price, not the size of the company; the Dow Jones Industrial Average and the Nikkei 225 are the two best known examples. Market cap weighting means a company's influence is proportional to its total market value (share price multiplied by shares outstanding); the S&P 500, the Nasdaq Composite, the FTSE 100 and the DAX are all calculated this way, the same logic behind Tehran's own overall index, which you saw in the lesson TEDPIX vs the Equal Weight Index.
A currency exchange rate (FX pair) is the price of one currency in terms of another, such as "euro to dollar" or "dollar to yen." Alongside stock indices, the global FX market is the second gauge this lesson introduces.
The mechanism: from one share's price to one global number
Building an index takes three steps. Step one is choosing the company list: the S&P 500 covers roughly five hundred large American companies, the Dow Jones Industrial Average only thirty large American industrial and services companies, the Nasdaq Composite most companies listed on the Nasdaq exchange (heavily weighted toward technology), the FTSE 100 the hundred largest companies on the London Stock Exchange, the Nikkei 225 two hundred twenty five large companies on the Tokyo Stock Exchange, and the DAX forty large companies on the Frankfurt exchange. Step two is choosing a weighting method, price weighted or market cap weighted, as defined above. Step three is the daily calculation: at the close of each trading session, every member company's closing price is fed into the formula at its assigned weight, producing a new index value; the cycle repeats again tomorrow.
Alongside stock indices, the global foreign exchange market is this lesson's second gauge: the largest and highest volume financial market in the world by daily trading value. There is no company weighted "index" here, but the exchange rate of a major currency pair (euro to dollar, dollar to yen) plays the same role, a single number summarizing the relative strength of two large economies. For a dated example, at midday on Sunday, August 10, 2026 (19 Mordad 1405), one euro traded for about 1.1564 dollars and one dollar for about 158.46 yen.
Why track any of this at all? Because each of these numbers is a thermometer for part of the global economy: the S&P 500 and Nasdaq reflect the overall US economy and its technology sector, the FTSE and DAX reflect the UK and German stock markets, the Nikkei reflects Asia's largest economy. When most of these indices move in the same direction at once, all green or all red, it usually signals a shared global news event or risk: a Federal Reserve rate decision, a US inflation print, or a geopolitical flare up.
Worked example
Suppose three hypothetical companies exist in a hypothetical market: Company A trades at 100 currency units per share with 10 million shares outstanding (market value: 1 billion units), Company B trades at 50 units with 200 million shares (market value: 10 billion units), and Company C trades at 10 units with 500 million shares (market value: 5 billion units). The combined market value of the three is 16 billion units.
In a market cap weighted index, each company's weight equals its share of that 16 billion: Company A carries only 6.25 percent, Company B 62.5 percent, and Company C 31.25 percent. But in a price weighted index that simply sums the three prices, 100, 50 and 10 (total: 160), the weights flip completely: Company A becomes the heaviest member at 62.5 percent, Company B 31.25 percent, and Company C only 6.25 percent. So if tomorrow only Company A's share price rises 10 percent, the market cap weighted index rises only about 0.62 percent (because A is small there), while the same news pushes the price weighted index up about 6.25 percent (because A carries the heaviest weight there). This is exactly the difference between the Dow Jones Industrial Average (price weighted) and the S&P 500 (market cap weighted): a high priced but relatively small company can move the Dow more than a multi trillion dollar giant does.
For one real, dated example: at the close of trading on Friday, July 3, 2026 (12 Tir 1405), the S&P 500 stood at about 7,483 points, the Nasdaq Composite at about 25,833 points, and the Dow Jones Industrial Average at about 52,900 points; all three numbers change on every trading day and carry a different value today.
In Iran's market
Iran has no large exchange for American or European shares, so these indices do not move anyone's money in Tehran directly, but their news reaches the domestic market through three indirect channels. The first channel is gold and coin: the global gold ounce, priced in dollars, stood at about 4,355 dollars at midday on Sunday, 19 Mordad 1405; at the same moment Tehran's free market dollar traded at about 184,800 toman. Multiplying these two figures is the base of the formula behind domestic melted gold and coin prices (this channel is the subject of the next lesson in this course). The second channel is oil and base commodities: sharp global stock market moves often coincide with shifts in crude oil prices, and oil feeds directly into government foreign currency revenue and, through it, the exchange rate. The third channel is overall risk sentiment: when major global markets fall together, "global risk aversion," capital moves toward safer assets like the dollar and gold, and that flow shows up, with a lag, in Iran's free market dollar rate and its domestic crypto market too. To track these numbers live, Sahmino's S&P 500 page updates automatically.
Common mistakes
- Equating "the index rose" with "every stock in that market turned green": because most major indices are weighted, a handful of large companies rising can push the index number up even if most smaller companies closed lower that day, the same point that applies to TEDPIX versus the Tehran equal weight index.
- Thinking of an index as something you can "buy" directly: an index itself is only a calculated number; investing in one is usually done through index funds or futures contracts, not by purchasing "the index" itself.
- Expecting every piece of global index news to show up in Iran's market the same day and at the same size: the transmission channels (gold, oil, risk aversion) usually take anywhere from a few hours to a few days, and the size of the effect depends on the type of news.
Summary
An index is a single number that summarizes the price movement of a group of shares; its weighting method, price weighted or market cap weighted, decides which companies move that number the most. The S&P 500, Nasdaq, Dow Jones, FTSE, Nikkei and DAX are each a thermometer for part of the global economy, and their news mostly reaches Iran's market indirectly, through gold, oil and global risk aversion flows, not directly. In the previous lesson, Sanctions and the Mechanics of Money Transfer, you saw why exchanging currency under sanctions costs more; in upcoming lessons in this course we will open each of these channels, global gold, oil, the dollar index, separately and in more depth. See the full lesson list on the Sahmino Academy page.
