Global & Regional Equity Indices: From the S&P 500 to Tadawul and Borsa Istanbul

Free float is one word that decides whether your index can even be compared to theirs. Today we learn which families build the world's stock indices, and how they differ from Tehran's index. Most of us compare Tehran's index number straight to a foreign one, without knowing that comparison misleads. A stock index is one number that summarizes the price move of a basket of shares. In a price weighted index, like the Dow Jones, a stock's weight comes only from its price, not company size. In a market cap weighted index, weight comes from a company's total value, even shares that never trade. A free float index counts only the shares actually available to trade, the standard for most big indices today. The S and P five hundred, Tadawul, Borsa Istanbul, and Tehran's headline index, four different numbers, one day. Two hypothetical firms exist. One has more value but less float, the other the opposite. They rank differently. Tehran's headline index, unlike these three, is not free float weighted. Its basis is each stock's total value. Persian Gulf indices move with oil, the same oil Iran's own rial is sensitive to. Borsa Istanbul mirrors a neighboring economy, and the S and P reaches Iran's gold via the dollar index. Common mistake one, never place two raw index numbers side by side, they started from different base years. Common mistake two, do not assume Tehran's headline index is free float too, only its separate free float index is. To watch this properly, compare percentage changes, never raw numbers, and track oil and the dollar index too. The one thing to remember, to compare two markets, read the percentage change, never the raw index number. Now you have the answer: free float splits indices apart. Got a question? Leave a comment.