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How Stock Market Indices are Calculated 📊 Each market index uses its own formula when selecting companies. The main factor could be market capitalization or the inclusion of all companies trading on the exchange. Next, after selecting the companies, it's necessary to determine how they will be represented in the index. Depending on the weighting of the companies in the index, their influence on the indicators can be equal or depend on market capitalization or stock price. Three types of weighting: 1️⃣ Market Capitalization-Weighted: The larger the company, the greater its influence on the index. 2️⃣ Equal-Weighted: All companies have an equal influence on the index. 3️⃣ Price-Weighted: The higher the stock price, the greater its influence on the index. Thus, the calculation of indices takes into account various factors to represent the state and movement of the stock market. ⚡️ Re-read the post to better retain the information.

How Indices are Formed in Financial Markets 👨‍🏫 Indices are constructed based on specific criteria that reflect the dynamics of a particular market segment. This can range from a broad market, including the largest companies in a country, to a smaller market tied to a specific industry. 🧐 After selecting the criteria and the corresponding companies, calculations are performed to determine the index value. The index is measured in points, but for investors, its relative dynamics are what matter. If the index decreases, it indicates that the stock prices of most companies included in it are falling, and vice versa. Indices are composed based on a basket of assets, which can include stocks, bonds, metals, currencies, and commodities. It's important to note that the composition of indices is not fixed and can change daily.

Stock Market Indices: Why They Matter ℹ️ An index is an indicator that reflects the state and dynamics of the market (we're talking about the stock market). It represents a virtual portfolio with assets from large companies or small and medium ones, depending on the index's goals. ⚡ The main purpose of an index is to reflect the current state of the market and investor sentiment. Why is sentiment so important? An index's rise indicates a market uptrend, where investors are buying stocks and their prices are rising. Conversely, a falling index indicates selling activity and declining stock prices.

Remember, indices help us get an overall picture of the market and make more informed investment decisions.

Turn on notifications, as I'll explain this in more detail later. Knowing the basics is the foundation of a successful investor.

Phases of Bull and Bear Markets According to Dow Theory ⚡ Dow identified common features that help understand which trend phase the market is in. This information is a must-have, so read carefully. Using the bull market as an example: 1️⃣ Accumulation Phase: Prices slowly rise, trading volume increases, and the surrounding information gradually fills with positive news. 2️⃣ Development Phase: Retail investors notice the positive sentiment and start buying as well. This is the longest and most active phase, leading to significant price increases. 3️⃣ Distribution Phase: Here, the market reaches its peak, and experienced investors and traders close their positions. However, retail investors continue to increase theirs. Then, a trigger occurs: ordinary investors notice the negativity, and the market transitions from its peak to the bear phase. Interestingly, the distribution phase of the bull market is the same as the accumulation phase of the bear market. This is the cycle of bears and bulls in the market.

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Classification of Price Movements in the Market 👨‍🏫 Charles Dow, the author of a theory that became the foundation of technical analysis, proposed a classification of price movements that every trader and investor should be aware of. All current approaches to chart analysis are based on his work. Dow suggested dividing price movements into three types: 1️⃣ Primary Trends: These are long-term movements lasting a year or more. This category includes bull or bear markets. 2️⃣ Secondary Trends: These last from a few weeks to several months. Examples of such trends include rallies in a bear market. 3️⃣ Minor Trends: These last from a few days to a few weeks. These are small fluctuations that can be considered market noise, especially for long-term investors. However, for swing traders, they form the basis of their strategy. Personally, I tend to focus more on primary and secondary trends, as they offer more significant long-term gains.

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Classification of Price Movements in the Market 👨‍🏫 Charles Dow, the author of a theory that became the foundation of technical analysis, proposed a classification of price movements that every trader and investor should be aware of. All current approaches to chart analysis are based on his work. Dow suggested dividing price movements into three types: 1️⃣ Primary Trends: These are long-term movements lasting a year or more. This category includes bull or bear markets. 2️⃣ Secondary Trends: These last from a few weeks to several months. Examples of such trends include rallies in a bear market. 3️⃣ Minor Trends: These last from a few days to a few weeks. These are small fluctuations that can be considered market noise, especially for long-term investors. However, for swing traders, they form the basis of their strategy. Personally, I tend to focus more on primary and secondary trends, as they offer more significant long-term gains.

Key Principles of Markowitz's Portfolio Theory Let's recall a few principles from the creator of the portfolio theory: 1️⃣ Diversification: Diversifying assets in a portfolio reduces the risk associated with individual assets and increases the potential for stable returns. 2️⃣ Rationality: Investors make rational decisions based on available information and aim to maximize their benefits. 3️⃣ Optimal Portfolio: There is an optimal balance between risk and return that an investor can achieve through various combinations of assets. 4️⃣ Efficient Frontier: This is a graphical representation of asset combinations that provide the best trade-off between return and risk. The optimal portfolio is chosen based on the desired level of risk and expected return. 5️⃣ Risk and Return: There is a relationship between expected return and risk level. Riskier assets may offer higher returns but are also subject to greater volatility and potential losses. It's important to consider goals and preferences, as well as to analyze the market and information to make informed investment decisions.