The DAX (Deutscher Aktien Index) is a stock index based out of Germany that represents the 30 biggest German companies that trade on the Frankfurt Exchange. The index value is calculated every second based on Xetra technology.
DAX Stock Index Explained
The DAX Index tracks 30 large and actively-traded German companies within the Frankfurt Exchange, which is the largest financial exchange in Germany. The DAX is the most prominent stock index for Germany, and it is considered to be a proxy for the performance of the German economy and market conditions.
Companies that are listed on the DAX are multinational companies that operate in multiple countries beyond just Germany. However, they play a large role in terms of making up a significant portion of Germany’s gross domestic product (GDP). The companies’ success is a key contributing factor to what is known as “Wirtschaftswunder” or the German Economic Miracle, which refers to Germany’s economic rebirth after the fallout of World War II reparation payments.
The companies within the DAX operate within many different sectors and are well known internationally. Examples of such companies include:
Stock Index Definition
To better understand the DAX and what it represents, it is a good idea to review what an index is. An index is a method of tracking the performance of a group of assets with prices in a standardized way. Some examples include the Consumer Price Index (CPI), which is a basket of general consumer goods weighted into an index and is used to measure inflation over time.
A stock index will aggregate the value of stocks into an index so that the performance of the basket of stocks can be measured. Many different ways are used to measure and value indexes of the constituent stocks. Some common methods include:
Market-Cap Weighted Index – Constituent stocks are weighted based on their market capitalization, which is equal to the stock price multiplied by the number of shares outstanding.
Free-Float Adjusted Market-Cap Weighted Index – Similar to the market-cap weighted index, except it takes into account the number of shares that are actually available for the general public, i.e., not held by insiders.
Price-Weighted Index – Constituent stocks are weighted only on the price per share of each stock, which raises a concern when there are stock splits that affect prices but do not affect the fundamentals of individual constituents.
Equal-Weighted Index – Constituent stocks are given an equal weighting within the index.
The DAX Stock Index is calculated based on the free-float adjusted market-cap weighted index methodology.
History of the DAX Stock Index
The DAX Stock Index was created in 1988 at an index value of 1,000 points. At that time, the DAX companies made up around 75% of the total market capitalization of the entire Frankfurt Exchange. As of July 2020, the DAX Stock Index value is at around 13,000 points.
The DAX Stock Index is a very concentrated index holding only blue-chip companies that are very large and successful. It is very similar to the Dow Jones Industrial Average (DJIA), which is a price-weighted index that includes 30 very large U.S. companies.
The Frankfurt Exchange is one of the world’s major financial exchange companies. Some other notable financial exchanges are:
Most stock indexes impose various requirements and hurdles that need to be cleared to be eligible to be listed on the index. For example, the S&P 500 Index – which is one of the most reputable U.S. indexes, requires companies to post four straight quarters of profitability before being considered eligible to be listed in the index.
The DAX requires that companies pass strict criteria tests before being admitted into the index. The requirements are re-evaluated every quarter when the composition of the index is evaluated. Examples of the requirements include:
With headquarters in Germany
With a minimum free float of 10%
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