An index is created to measure the change in any of the instruments, stocks or any other things that can be calculated over a large period so that an individual doesn’t require to look at each and everything, he/she can get a clear idea by looking at its index. Let’s understand what is stock market index.
Table of Contents
What is stock market index?
A Stock Index or stock market index is a measure of the stock market that shows the changes that have taken place, investors use this to get a rough idea of how market performed today over its historic returns as measuring each stock is tough and it is difficult to infer anything from it.
The most widely referred stock indexes in India are NSE (National Stock Exchange) and BSE (Bombay Stock Index) where more than 7000 companies are listed, and traded every day.
Stock Indexes are grouped on many bases such as Market Price, Market Capitalization, Sector etc.
How does the price changes in index?
As you can see from the above image you can see that in the first scenario index value is 6,000 comprising of stock prices as stated above and in the second scenario you can see that index value has grown to 6,950.
Even though the stock prices of F and G has increased it gave increment in index value over all and that is how the price of the index is affected. That is about 15.8 % increase in second scenario and similarly the weightage of the stock also changes.
Types stock market index?
1. Broad Market Index
These indices are broad-market indices, consisting of the large, liquid stocks listed on the Exchange. They serve as a benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments. Example of such are NIFTY 50 and NIFTY NEXT 50.
2. Sectoral Index
This index is more divided into different sectors such as Auto, Bank, FMCG, Consumer Durables, Financial Services, IT, Media, Metal, Pharma, Realty and PSU Bank.
This sector mostly focuses on the sector that a particular business belongs to and it performs against its competitors.
3. Strategy Index
Strategy indices are designed on the basis of quantitative models / investment strategies to provide a single value for the aggregate performance of a number of companies.
In this the stocks are classified according to their volatility, market capitalization, dividend opportunities and beta value.
4. Thematic Index
This index lists the stocks that belong to a particular theme such as Commodity index, Energy index, Consumption index, Service index, liquid index and many more.
The idea behind these indices is that to give investor a clear idea of how a particular theme of stocks are performing and what returns it has generated over the years.
5. Fixed Income Index
This index offers comprehensive benchmarks for the fixed income markets in India, that consists of Government Securities, T-Bills, Corporate Bonds, Money Market and Commercial Papers.
USES
1. For Selection – If you are investing in any fund or looking for it you would find that, the fund usually compared with index as a benchmark for the fund to look out how it has performed.
2. It represents the market which you have invested in and tells more about the stability of the stock. It can also give you an idea when the specific sector is not doing well and act as you like.
3. As passive investing is the great benefit that an individual can take from the index, as if you have passively invested in the index NIFTY 50 you would have earned about 13% CAGR.
4. Sentiment Tapping – you would get to know about the sentiment of people as it drives the stock price. Before investing you should know the reasons for rise and fall of the stock price.
For ex: – People would buy HDFC Stock as it is the one of the largest private sector banks and it holds more weightage in the index.
Bottom Line
In a nut shell index shows report card of the stock market, people relate directly the performance of stock market with the economy of the country which can be held reliable and not in many cases.
I hope that you have got a clear idea about it please share this article “What is stock market index? – Everything you need to know” if you found it informative…
Leave a Reply