Stock exchanges and indices

There are numerous stock markets around the world. Examples are Euronext Amsterdam in the Netherlands, the New York Stock Exchange (NYSE) and the NASDAQ in the US and the Tokyo Stock Exchange in Japan.

In order to give investors a clear view of how shares or groups of shares on a stock market are performing, stock markets have developed indices. AEX is one such index, which includes the 25 companies with the highest market capitalisation. Other Dutch indices are AMX and the AScX. The Dow Jones Industrial Average, S&P500 and NASDAQ100 are indices in the US that you will probably have heard of.

A stock exchange is a place where investors can trade securities, and where the price is determined by supply and demand. Securities is a collective term for all the financial products that are traded on a stock exchange, including shares, bonds and funds. Private investors cannot trade on the stock exchange themselves, but are able to buy and sell via a financial body or broker.

There are numerous stock exchanges throughout the world, and Euronext Amsterdam is one of them. Every stock exchange has a select number of companies that are publicly traded on that exchange. Stock exchanges are monitored by the financial authority of the country concerned.

An index is a type of measuring tool that tracks the performance of a group of shares. The AEX index, for example, shows how the 25 largest and most widely traded companies on the Amsterdam stock exchange are doing. If the AEX goes up, most of these 25 companies will be doing well. If an index undergoes a sharp rise or fall, it’s usually a reflection of what’s going on in the economy.

The share price is the price at which the share changes owners. A price is established when there is demand for a share, and also supply. When demand is high, the price goes up. When supply is high, i.e. lots of people want to sell the share, the price drops.

The current price is not the exact price you will pay or receive for the share. For that, you have to look at the bid price and the offer price. These two figures tell you price at which you can sell or buy a share: 

• Bid price
  This is the highest price that someone is willing to pay for a share at a specific point in time, and at which you will be able to sell the share. Given that there are often large numbers of sellers and buyers operating on the market at the same time, the bid price fluctuates constantly.
• Offer price
  This is the lowest price at which someone is willing to sell a share. It is the price at which you will then be able to buy the share. Again, given that there are often large numbers of sellers and buyers operating on the market at the same time, the offer price is also subject to constant change.
• Spread
  The difference between the bid price and the offer price is referred to as the ‘spread’. Shares that are traded on numerous occasions on a trading day tend to have a tight spread, while shares that change owners less frequently are likely to have a wider spread.

Alongside the price that you pay for a share, you must also take various costs into account. Read more about the costs involved in investing.

Most start-ups don’t make a profit in their early stages. And if they do, they usually decide to reinvest the profits to stimulate more growth. The idea is for this growth to push up the share price to benefit shareholders. We call this kind of share a ‘growth share’.

Established companies generally grow at a slower rate and tend to have a more stable revenue stream. This allows them to pursue a policy of using their profits to pay dividends to their shareholders. Shares in these kinds of companies are called ‘dividend shares’.

Put simply, the returns on dividend shares come mainly from the dividends they pay out. Growth shares, on the other hand, generate most of their returns when their price goes up. Needless to say, returns are not guaranteed in either case. Growth share prices tend to be more volatile, meaning that there is a greater chance of them going down. This explanation does not always apply. Results depend on specific situations and shares.