Nikkei 225 Index

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The Nikkei 225 index of the Tokyo Stock Exchange (TSE) stands out from among its peers in several ways. It is fair to consider it a one-of-a-kind index that follows none of the well-known molds of other popular indices.

First off: the Nikkei 225 is a very old mathematical artifice, that does indeed paint a rather accurate picture of the economy of the country. It includes 225 of Japan’s largest publicly owned companies and it uses a price weighted method to determine the contribution of individual constituents.

Another peculiarity of this index is that it has been calculated daily, since 1950, by the Nihon Keizai Shinbun newspaper. While it was officially started on September 7, 1950, the issuer retroactively calculated it to May 1949.

While, as mentioned, initially it was updated daily, since 2010 it has been updated every 15 seconds during trading hours.

What is the price weighted method?

Price weighted indexes, like the Nikkei 225, use the stock price of constituents to determine their weight in the index. While the actual index formula makes use of an index-specific constant, and is a little bit more intricate, the gist of it all is that the higher its stock value, the more weight a company carries.

Obviously, Nikkei 225 is a great choice for those looking to gain exposure to the Japanese economy. The way to trade it is through derivatives. Nikkei 225 futures were first introduced by the Singapore Exchange in 1986.

The Osaka Securities Exchange was the next one in line, in 1988, followed by the CME (Chicago Mercantile Exchange) in 1990. Nowadays, the legitimacy and value of the Nikkei 225 is unquestionable world-over.

Index funds represent another reasonable path to investing in the Nikkei. The Daiwa Japan Nikkei 225 Index Fund offers competitive pricing. How do such funds work?

They attempt to mimic the action of the Nikkei 225 by purchasing shares of its constituents.

Yet another way in which the Nikkei 225 defies the trends followed by its peers, is through the evolution of its value.

Most similar indices have increased exponentially over their existence. Not so the Nikkei 225.

Having reached an intraday peak of 38,957.44 on December 29, 1989, it headed into a downward trend, which saw it hit 7,054.89 in March 2009. This massive downswing is in effect to this day.

The crash was triggered by the bursting of the Japanese asset price bubble and aggravated by a series of other factors.

That said, the annual returns yielded by the index have fluctuated over the years. Since 2012, the index has been proven an attractive investment vehicle yet again.

The diversity of its pool of constituents is what lends the Nikkei 225 such relevance in regards to accurately reflecting the state of the Japanese economy.

Its 225 constituents cover industries such as steel, gas, shipbuilding, pharmaceuticals, chemicals, textiles, automotives and foods, among others.

The components of the Nikkei are reviewed every September. Adjustments to the pool are made every October.

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