The introduction of the euro brought the citizens of Europe many advantages, including uniformity. It would be nice if that uniformity also applied to the comparison of the various stock exchanges.
An index point is not a fixed unit in time and does not have any historical significance, so the European citizen may therefore not attach any significance for the future.
Comparing index points to their history and also comparing the various stock exchanges makes no sense.
The time is ripe to reindex European stock exchanges to 100 points.
Reindexing to 100 points has many advantages
After the introduction of a single currency for Europeans, it is important that the EU also creates uniformity in the stock exchanges. Because a stock market index has no relevant future value, the time is ripe to re-index stock markets to 100 points. The re-indexing of the stock exchanges to 100 points can be easily implemented.
For each stock market index, a so-called DIVISOR100-value is introduced.
The value of each DIVISOR100 is determined by the number of index points from the final position of a stock market at a certain date, eg. December 31, 2013 divided by 100. On December 31, 2013 the AEX ended at 401.79 and thus AEX_DIVISOR100 gets the value 4.0179 (401.79 divided by 100). The DAX ended December 31, 2013 at 9552.16 and thus DAX_DIVISOR100 gets the value 95.5216 (9552.16 divided by 100).
Table: Overview of values for DIVISOR100 for the various stock exchanges
Dividing the number of points of each stock market by the DIVISOR100-value, the stock market is reindexed at 100 points. The AEX ended on December 31, 2013 at 401.79, and the number of points for the AEX is now divided by 4.0179, the value of the AEX_DIVISOR100. The DAX ended December 31, 2013 at 9552.16 and the number of points on the DAX is now divided by 95.5216, the value of the DAX_DIVISOR100. To this the indexes of these stock exchanges on reindex-date January 1, 2014 are at 100 points.
The advantage of this method of re-indexing is that each stock market retains its own characteristic properties, such as composition and calculation and that the history of the market chart also is retained. The technical analyst can still continue to apply the same methods to the stock market graph and recognize patterns in the graph.
For the citizens of Europe the stock markets are much more transparent with this reindexing.
The closing position of the market prices at June 30, 2014 without reindexing:
The closing position of the market prices at June 30, 2014 after re-indexing:
At a glance, citizens can see how a stock market is doing compared to the 100 points. He sees immediately what percentage the index declined or rose from January 1, 2014. Comparing market indices inside and outside Europe is a piece of cake. The emotion factor in the current formulas of the market indices, the reluctance and or euphoria of investors caused by large fluctuations in points is greatly reduced by the re-indexing, and hence the rationality of citizens and investors will predominate.
Transition and costs
In order for the citizens of Europe to get used to the idea of re-indexing of the exchanges, the old index values can still be published alongside the new index values during a transition period. In due course they will only have a view for the new index values. The cost of this project for the European citizens will be nil; the formulas that calculates market indices are already changed several times annually.
For additional background information:
The Dow Jones Industrial Average: a Fata Morgana (http://www.advisorperspectives.com/dshort/guest/Wim-Grommen-140630-Dow-Fata-Morgana.php)