What Are Stock Market Indices?
Published by Sharekhan Education | March 3, 2023
By Fahim Ansari | Sharekhan Education
A stock index is a term that refers to a specific type of security that tracks the value of a particular class of stock, such as an entire industry or an entire country’s market. In other words, the Index tracks different companies’ stock price movements. Some examples are Nifty, Sensex, S&P 500, Nasdaq, DAX, FTSE etc.
It is often used to measure the performance of an entire industry or country’s stock market by tracking its overall value over time. The main benefit of using this approach is that it allows investors to see how well their investments are doing compared with other investments in different sectors or countries worldwide. To increase their fortunes, investors invest their money in the market. They should be familiar with market indices or indexes to grow their invested capital.
Each stock market index keeps tabs on the performance and price changes of the stocks that comprise the Index. This shows a direct correlation between that the performance of the stocks that make up any stock market index and the performance of the index. As the prices of the stocks in an index grow, so does the Index overall.
How is an Index formed?
The creation of stock market indices depends on various factors, including the industry, market capitalization, segment, and many more. Stocks from multiple companies that satisfy the earlier standards are chosen once the indices have been created. Following that, the Index is calculated based on the stock selection. Each stock, however, will have it’s price, and the price range in one stock will not be the same as that. As a result, adding the prices of all the stocks does not yield the index value.
As a result, giving stocks weights comes into play. Each stock in the index is assigned a specific weight depending on its current market price or capitalization. The weight specifies how stock price changes affect the index value. The two most famous stock market indices are as follows:
1. Market Cap Weightage: It is calculated by multiplying the stock price by the total number of outstanding shares the company has issued.
2. Price Weightage: In this method, the index value is calculated using market capitalization rather than the company’s stock price.
Types of Indices in the Stock Market:
Benchmark Indices: Benchmark indices compare the performance of a group of stocks to the performance of other stocks and securities in the market. The benchmark indices are the NIFTY 50 and the BSE SENSEX. As a result, they are widely regarded as the most trustworthy source of information about how markets function in general.
Sectoral Indices: Stocks from several industries, such as Nifty Auto, Nifty Bank, Nifty Metal, and Nifty Pharma etc., are included in sectoral indices. In this case, the performance of the sectors is used to gauge stock performance.
Market Cap Indices: Few indices choose companies based on their market capitalization. Any publicly traded corporation’s stock exchange market value is referred to as market capitalization.
Apart from the one listed above, other indices include the Global Coverage Index, Regional Coverage Index, Thematic Index, etc.
Conclusion:
Stock indices are a great way to measure the performance of an entire industry or country’s stock market. They can be used in many ways, ranging from simple tracking of the value of stocks to more complex strategies that involve derivatives like options and futures contracts.
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