Stock Indices Price Guide: What Moves an Index’s Price?

Since there are numerous components that might affect the structure and function of market indices, indices' prices are prone to moving in response to a range of factors other than the overall performance, growth, and health of the economies and sectors that comprise it.

Hence, it is important to grasp what moves market indices' prices in order to understand and apply them effectively to your trading strategy.

While it may be exciting to follow top performers on their growth journeys, it is important to understand what moves an index's price.

TL;DR

• Indices move beyond just economic growth: Political events, market sentiment, and company-level changes can impact index prices.
• Construction matters: Indices are built using different methods, like float-adjusted market cap (e.g., FTSE 100) or price-weighted (e.g., DJIA).
• Examples illustrate volatility: Events like the Iran-Israel conflict, the Omicron outbreak, and Moderna's Delta-variant-driven surge all affected index values.
• Market sentiment is powerful: Fear or optimism among investors often drives large index swings.
• CFDs on indices: Platforms like Plus500 allow traders to speculate on index movements without owning underlying assets.

Factors Affecting Index Prices

• Political and national events: Political events like wars, disputes, peace treaties, and trade agreements can destabilise and change indices.

  For example, the conflict between Iran and Israel has produced a mixed effect on global stock indices in 2024 and 2025, highlighting the uncertainty and shifting risk perceptions among investors.

  At the outset, markets reacted with heightened volatility and sharp declines as tensions escalated, particularly following significant military actions like Israeli airstrikes on Iranian targets. Investors initially sought safety, increasing oil prices and boosting traditional safe-haven assets such as gold and the US dollar.

  However, as the conflict continued without causing major disruptions to global oil supplies or sparking wider regional escalation, many stock indices, including those in the US, Europe, and the Middle East, recovered and even recorded gains. This suggested that investors were, at least temporarily, discounting the broader risks.

  That said, market sensitivity persisted. On days when fears of a wider regional conflict or disruptions to key oil routes like the Strait of Hormuz intensified, stock indices saw renewed declines. Conversely, energy sector stocks generally benefited, buoyed by rising oil prices.

  In essence, while the Iran-Israel conflict has caused short-term market swings and periods of investor unease, global stock indices have largely stabilised, provided there is no significant escalation or major threat to oil supply chains. A more severe and lasting market impact would remain possible if the conflict deepened or key energy infrastructure was compromised.

• The companies that make up the index: Shifts in company policies, decisions, value, and other related factors could affect the index as a whole. This means that macroeconomic changes can lead to big shifts in the entire index.

  Moderna's increased value during the spread of the Delta variant is an example of this. Accordingly, "Moderna stock provided a return of 434%" in August of 2021, easily outpacing the average for the S&P 500 (USA 500), which was 33%."

• Economic statistics: Data like inflation, unemployment rates, interest rates, companies' earnings reports, consumer data, and more can shift the movement of indices. A good illustration of how economic data shifts market indices is Powell's latent hawkish statement following his reappointment in November 2021, during which indices like the S&P 500 and the USA 30 declined at first, and then rebounded. An additional example is the Nikkei 225 (Japan 225) index's decline in September 2021, due to higher inflation rates.

• Market sentiment: Market sentiment, otherwise known as "traders' sentiment," refers to investors' prevailing attitude toward the current market. In other words, when the majority of investors speculate that a market is going to fall, they refer to it as a "bearish" market. The prevailing sentiment could, therefore, affect the indices market and the way they're traded. You can get alerts on traders' sentiments, price changes, and more through Plus500's alerts feature. The sell-off of Cryptocurrencies in December 2021 is an example of the impact of trader sentiment on market indices, in light of prevailing Bearish sentiments. This, in turn, could have an effect on the Crypto 10's index.

How an Index Is Constructed

As we noted above, many variables go into the construction of a market index since each index is based on a variety of companies. This means that any changes in their performance can also result in a change in the index and its composition. Hence, when compiling an index (group) of companies, it is important to measure them in a way that is useful, clear, and organised for investors.

For example, in 1984, investors were interested in keeping track of the top 100 companies that were publicly traded on the London Stock Exchange. Financial Times Stock Exchange (FTSE), a private organisation, took upon itself the task of reviewing earnings reports and accounting records of each company that was traded on the London Stock Exchange (LSE).

Their research helped to understand the overall value (market capitalisation) of each company on the exchange. They then selected the top 100 companies based on market capitalisation and compiled them into a list. Each quarter, members of FTSE convene to review new earnings reports to determine which companies may remain on the top 100 list, which companies will fall off, and which companies will fill the new vacancies.

Plus500 offers traders the opportunity to trade CFDs on these indices.

How an Index's Value Is Calculated

Calculating indices' values can often be a complicated task. For example, the FTSE 100 index is calculated by compiling the total value of the London Stock Exchange's top 100 companies (FTSE 100). Thus, it may be hard to understand this index's performance over time. Nonetheless, there are two popular mathematical tools that are used in order to break down the value number from the trillions to the more digestible thousands that we know today.

• Float Adjusted Market Capitalisation Valuation

  If a company initially issues 1,000 shares, this does not necessarily mean that 1,000 shares are available for purchase or trade in the open market. They may decide that 850 shares (85%) can be traded freely on the London Stock Exchange while the remaining 150 shares (15%) are allocated to internal directors. For the sake of the indices, the company's value will be calculated based on those 850 open market shares, excluding the non-tradable 15%. The terms used to describe these shares are 'Floating Shares' or 'Floating Stock', or 'Float' for short. Furthermore, low numbers of shares are considered 'low float stocks'.

  This can be visualised as:

  (All company shares - locked-in shares) X Share value = Free Float Value

  In 1984, FTSE compiled the FTSE100 (UK 100) and gave it an initial value of 1,000 points. To come to this number, they did a simple equation:

  Combined Float Adjusted Market Capitalisation (Market Cap) of the top 100 LSE companies =1000

  The next quarter, they did another calculation (New Market Cap totals/ previous Market Cap totals) x 1000= Q2 FTSE100 point value

  Using this method, you can see that as the value of these companies grows, so do the points of the FTSE100. Note: In order to keep funds as consistent as possible, companies must demonstrate a market cap that is equivalent to position #90 and may fall to position 111 before being removed.

• Price Weighted Valuation

  Another method is to consider the price of the stock over the market capitalisation of the company. To do this we compile a list of companies in a group, just as we did for the FTSE, except this time we look at the price of each individual stock and nothing else. This is the system used by Charles Dow and Edward Jones when they created the Dow Jones Industrial Average (DJIA) in 1885.

  The DJIA gives companies with higher share prices a greater influence on the index's movements.

  Total value of each individual share added together / divisor (ex., 1000) = Index Value.

  Note: The divisor value is not disclosed and is changed regularly to avoid excessive volatility.

Understanding Index Fluctuations

Now that we've explored the ways that indices are calculated and got an example of how they are constructed, we can begin to understand their valuations and how they move up and down.

During larger market events such as natural disasters, international trade disputes, or the Coronavirus pandemic, and specifically the emergence of a new virus variant like the Omicron and the Delta strains, shareholders become nervous that the value of their investments may go down. This anxiety is expressed through the selling of their shares. Some shareholders may be happy to sell, knowing that if they hold on to these investments for a long time, there is a chance that a company may go out of business and the value of their investments will dissipate. As the market becomes flooded with sellers, buyers might come in and pick up shares at a reduced price.

On the other hand, new technology, trade agreements, positive earnings reports, or any other reason to feel optimistic in the market may lead investors to invest heavily in the company, raising the demand for a stock that is in a fixed supply.

As the value of a company grows, combined with the supply and demand of its share, it moves the share price as well.

When considering the value of an index, companies are continuously gaining and losing value on a daily basis, yet the average may balance out. This is why some top performers may lose value, yet if the value of other performers climbs up, the overall value of the index may remain the same.

Conclusion

Market indices are dynamic financial instruments influenced by complex factors beyond simple economic performance. Index prices are in constant flux from geopolitical events and national policy changes to company-specific news, economic indicators, and shifting investor sentiment.

Understanding these components empowers traders to navigate market volatility and helps them make informed decisions when trading index-based instruments like CFDs.

Grasping how indices are constructed and calculated, whether by float-adjusted market capitalisation or price-weighted methods, also provides critical context for interpreting their movements. Knowledge is your most powerful trading tool in the ever-evolving world of market indices.

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