Dax 30

Hi,

I know that the Frankfurt DAX 30 falls under the futures and equities markets but I am hoping that someone here (like rhodytrader - John) could just shed some light on something that has been really bugging me since last week.

Last week there was a global fall in the all of the indices worldwide thanks to Greenspans comments on China (and Bond rates).

What I don’t get is this:

The next morning (after the selloff had begun) both CNBC and Bloomberg showed graphical representations of each of the bourses by country and the indices in all countries worldwide (except Finland) were down.

This I get.

What I don’t get is this:

The DAX 30 (for example) is made up of 30 leading German Companies - the idea being that your risk exposure should be far less than say buying shares ONLY in Siemens (for example) (or trading 1 currency pair for example) for the simple reason that the DAX 30 lots that you have bought (or sold) are not dependant on the performance of a single company - not so?

Then why did the individual share prices of 27 out of the 30 companies that make up the DAX 30 start to fall last week? It is just not feasable that all of a sudden 27 out of the 30 companies had a sudden change of fortune. I can understand that people might have started selling DAX 30 lots - that made the INDEX go down - but how could this affect the individual share prices of those 27 companies?

I’m not sure if I’m wording this question correctly - what I am asking (I think) is: are the indices driven by the individual companies that make up the index (same as the DOW, Nasdaq 100, etc. etc.) or does the index drive the share prices of the individual companies that make up the index?

That sounds like a stupid question and it may seem that the answer is obvious but, like I said, I find it hard to believe that 27 out of the 30 DAX 30 companies had a change of fortune - or - is it possible - that individual shareholders in those 27 companies just decided to start selling and that affected the DAX 30?

Or - to word it another way - by buying or selling DAX 30 (again - for example) are you actually buying (or selling) a certain percentage of each of those companies shares (based on their Market Capitalisation percentage) so conversely by buying (or selling off) DAX 30 you are actually affecting the share price of each of those companies? This does not make sense because then - theoretically ALL 30 of the companies would have shown a drop in their individual share price - and this was not the case.

Regards,

Dale.

The movement in an index has two sources. One is action directly in the index - futures, options, etc. The other is action in the component stocks. The two are linked so that indices are no longer just mathematical constructs.

Let’s use your Greenspan impact as an example. In that case the dominant action was probably selling of the DAX index, driving it lower. The decline there had to be reflected in the underlying stocks, though, to keep the two in line. Otherwise there’s an arbitrage opportunity. What is mostly likely happening in that situation is the folks on the other side of those index sell trades (who thus find themselves net long) are hedging themselves by selling the stocks.

Of course, on the flip side there are times when the action in individual stocks, or groups of them, push the index around. That, in turn, will lead to trading in the index futures and options to keep the traded index in line with the calculated one.

Does that help clear things up?

One point I will add, though, is this. On a general down day in the market I see absolutly nothing odd about that sort of action, or even all 30 of them being lower (or up on a strongly positive day). You’re talking about only30 companies, and ones that are most likely very global in nature. Of course they are going to feel the impact of international influences.

Be EXTREMELY cautious about making statements like “It is just not feasable that all of a sudden 27 out of the 30 companies had a sudden change of fortune.” If you review market history you’ll see that there isn’t much that cannot happen. How many of the Dow stocks do you think were down on Black Monday in 1987? I don’t know the answer offhand, but I would be somewhat surprised if any of them were up that day. Heck, it wouldn’t surprise me at all if the whole S&P 500 was down that day! :eek:

Hi John - thanks for that (now I’m definately going to buy your book)!

I really appreciate your input - thanks.

It has cleared things up for me. Like I said - I could not figure out ‘what drives what’ - your explanation makes sense.

Just to be clear though (for interest sake):

When you are trading DAX you are JUST trading the Index i.e. you are NOT buying a percentage (portion) of stocks in each of those individual companies that make up the DAX? Correct?

Never before has a more true word been spoken:

If you review market history you’ll see that there isn’t much that cannot happen. [I]John Forman[/I].

Thanks again.

Dale.

You are not directly doing so, but you are indirectly doing that. By that I mean if you buy the ETF you are essentially purchasing a share in a fund that owns the underlying shares. If you buy the futures or an option chances are that somewhere along the way (maybe a couple of steps removed from you) there is someone holding the shares.

The shares and the index are inextricably linked. Whatever is done in one will impact the other.

Thanks again - got it now!

One last question (and then I’ll leave you in peace - for now anyway):

Please have a look at this thread of mine:

http://forums.babypips.com/newbie-island/3082-does-anybody-know-where-get-type-information.html

Regards,

Dale.