The DAX or Deutscher Aktienindex (German stock exchange) is very popular especially among traders since it is very predictable. The DAX represents the 40 biggest and most liquidated companies in Germany. But in comparison to other indices like the S&P 500 it works a lot different concerning the selecion of the companies that are part of the DAX.
How the DAX works
There are different criteria for companies to get into the DAX. First is of course market capitalization but there are some other factors that make the DAX different from other indices. A big role plays the revenue on the stock exchange for example. The company has to be listed at the prime standard and it has to be traded on Xetra during market hours. Another big factor is free float. It says that at least 10% of the shares have to be free float otherwise the company won’t get listed on the DAX. And last but not least the company’s headquarters have to be in Germany.
Because of the criteria for the DAX it appears that there are as good as no private businesses on the stock exchange. Some of the biggest names on the DAX are companies like:
There are different indices of the DAX though. They differ the different companies in different categories that are defines by how valuable a company is. They are often referred to as different “leagues”. The first league is the normal DAX that everybody knows which contains 40 different companies. Then there is the MDAX that contains 50 companies that did not (yet) make it into the DAX and then there is the SDAX with 70 more companies. Every company can be promoted to the higher DAX level but with that it is also possible to be downgraded.
Another “league” that is not part of the three above is the TecDAX. The TecDAX lists the 30 biggest tech companies in Germany. And there is also a HDAX that combines the DAX, MDAX and the TecDAX all together.
The principle of free float
The principle of free float, also known as “floating stock”, “public float”, or “company float” is related to the number of shares of a company that trade on the stock exchange. The free float can be indicated in percentage or a number.
Free float describes the number of shares that a company sells to other people. This means free float does not include the shares that the company owns itself. And that number in percentage of free float has to be at least 10% if the company wants to be listed at the DAX.
The history of the German DAX
The DAX went public on July 1, 1988, for the most valuable companies in Germany. Back then it was only the DAX and only the most valuable 30 companies could be part of the stock exchange. Among those companies, Volkswagen, Siemens and BASF.
Like that it went through many different economic crisis. For example the dot-com bubble of 2000 and the 2008 financial crisis.
Not much changed for the DAX until 2021. Because that year changes happened. The DAX expanded to 40 companies and with that represents Germany’s economic skyline. Companies like Volkswagen or BASF are still part of the DAX but new ones joined as well. Now experts have very different opinions about the DAX. Some think it is not representative because of the way it selects companies. Other people, especially traders, love the German stock exchange because it is very predictable and they can make a lot of money of it.
The difference to other indices compared to the DAX
As mentioned some experts criticize the DAX for the way it selects its companies. Because usually indices don’t choose their stocks/companies like that. To show the main differences I will describe how the S&P 500, Nasdaq 100, and the Dow Jones Industrial Average work.
S&P 500:
In 1957 Standard &Poor’s found the S&P 500. The Index consists of the 500 biggest companies from the New York Stock Exchange (NYSE) and the Nasdaq.
Different to the DAX, the companies that are in the S&P 500 are only chosen because of their market capitalization. About 80% of the companies in the S&P 500 are US shares. And the S&P has different companies from various different branches. The biggest branch in the S&P is technology though.
Nasdaq 100:
The Nasdaq 100 was found in 1985 to trade the 100 biggest non-financial stocks. And just as the S&P 500, the Nasdaq 100 picks its stocks according to the market capitalization. The Nasdaq has also the advantage that it can be used to measure how the health or technology sector is doing and how it performs.
The Nasdaq as well as the S&P 500 are very dependent and can be influenced easily by big companies because 50% of the value of the Nasdaq is represented by the top 10 shares.
Dow Jones Industrial Average (DJIA):
The Wall Street Journal found the DJIA in 1896. The index focusses on price and market capitalization. In the DJIA you can find the 30 shares with the highest market capitalization from the NYSE and the Nasdaq.
Moreover the index includes various sectors such as communication, energy, technology, pharmacy and entertainment. It is also often used as benchmark to look at the performance of individual stocks.
Overall the common indices have little in common with the DAX especially the selection of the stocks that are in other indices is much easier and less complex. That leads to the circumstance that many people are much more familiar with indices like the S&P 500 or the Nasdaq 100 since they are just much better to understand and not that complicated with their organization.
The difference to the DAX
There are two different types of indices. There are performance indices on one hand, also known as total return indices. They not only consider the price movements of different stocks but also the dividends reinvested. It reflects the total return that an investor would have received if they held the index and reinvested all dividends.
On the other hand there are price indices that only consider price movements of the constituent stocks and do not account dividends or other income that someone generated with the stocks. With that the price indices provide a more straightforward view of how the stock prices change.
The DAX and the S&P 500 are examples for performance indices. But while they might sound similar due to this they are still very different since the DAX does not include tech stocks because there is a separate index for tech companies from Germany. The Dow Jones Industrial Average is an example for a price index and with that is a whole lot different from the German DAX.
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