Share price indices need and importance

Stock market is an important part of the economy of a country. The stock market plays a play a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. That is reason that the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. Whenever a company wants to raise funds for further expansion or settling up a new business venture, they have to either take a loan from a financial organization or they have to issue shares through the stock market. In fact the stock market is the primary source for any company to raise funds for business expansions. If a company wants to raise some capital for the business it can issue shares of the company that is basically part ownership of the company.

What Is a Stock Market Index?

There are thousands of companies listed on stock markets, making it almost impossible to monitor each company. This is why stock market indices are created. Market indices bring together a select group of company stocks and regularly measures them to show the performance of the overall market or a certain segment of the market.

In short, an index helps investors understand the health of the stock market, enables them to study the market sentiment and makes it easy to compare the performance of an individual stock. To understand how each sector of the stock market is doing, there are sectoral indices such as Nifty Bank. Nifty Auto etc. Click here to know about what stock market numbers say. From among the stocks listed on the exchange, some similar stocks are selected and grouped together to form an index.

This classification may be on the basis of the industry the companies belong to, the size of the company, market capitalization or some other basis.

For example, the BSE Sensex is an index consisting of 30 stocks. Similarly, the BSE is an index consisting of stocks. Click here to about how stock indices are affect by economic data. The values of the grouped stocks are used to calculate the value of the index.

Any change in the price of the stocks leads to a change in the index value. An index is thus indicative of the changes in the market. In a share market , there are thousands of companies listed. How do you differentiate between all of those and pick one or two to buy? How do you sort them out? It is a classic case of a pin in a stack of hay. This is where indices come into the picture. Companies and their shares are classified into indices based on key characteristics like size of company, sector or industry they belong to, and so on.

Indices act as a representative of the entire market or a certain segment of the market. They are considered to represent the overall market performance. Similarly, an index formed of IT stocks is supposed to represent all stocks of companies from the industry. Click here to read about how the indices are affected by economic growth. An index makes it easy for an investor to compare performance. An index can be used as a benchmark to compare against.

For example, in India the Sensex is often used as a benchmark. So, to find if a stock has outperformed the market, you simply compare the price trends of the index and the stock. On the other hand, an index can also be used to compare a set of stocks against a benchmark or another index. For example, on a given day, the benchmark index like Sensex may jump points, but this rally may not extend to a certain segment of stocks like IT.

Then, the fall in the value of index representing IT stocks could be used for comparison rather than each individual stocks. This also helps investors identify market trends easily.

Investor sentiment is a very important aspect of stock market movements. This is because, if sentiment is positive, there will be demand for a stock. This will subsequently lead to a rise in prices.

It is very difficult to gauge investor sentiment correctly. You can simply compare an index with a benchmark to see if has underperformed or outperformed. This will, in turn, reflect investor sentiment. Read here read about reasons for market volatility in India. Many investors prefer to invest in a portfolio of securities that closely resembles an index. This is called passive investment. An index portfolio helps investors cut down cost of research and stock selection. They rely on the index for stock selection.

As a result, portfolio returns will match that of the index. Indices are also used to construct mutual funds and exchange-traded funds ETFs. An index consists of similar stocks. This could be on the basis of industry, company size, market capitalization or another parameter. Once the stocks are selected, the index value is calculated. This could be a simple average of the prices of the components.

In India, the free-float market capitalization is commonly used instead of prices to calculate the value of an index. The two most common kinds of indices are — Price-weighted and market capitalization-weighted index. Every stock has a different price. So, the index value cannot be a simple total of the prices of all the stocks. Here is where the concept of stock weightage comes into play.

Each stock in an index has a particular weightage depending on its price or market capitalization. Kotak Research Centre offers stock research inputs for traders. Take a look at it here. This is calculated by multiplying the share price of a stock with the total number of stocks floated by the company. It thus takes into consideration both the size and the price of the stock.

In an index using market-cap weightage, stocks are given weightage on the basis of their market capitalization in comparison with the total market-capitalization of the index. For example, if stock A has a market capitalization of Rs. Similarly, another stock with a market-cap of Rs. The point to remember is that market capitalization changes every day as the stock price fluctuates. However, it is usually a marginal change. Also, the market capitalization-weightage method gives more importance to companies with higher m-caps.

In India, most indices use free-float market capitalization. In this method, instead of using the total shares listed by a company to calculate market capitalization, only the amount of shares publicly available for trading are used. As a result, free-float market capitalization is a smaller figure than market capitalization. Click here to know more about midcap stock relays. Stocks with higher prices have greater weightages in the index than stocks with lower prices.

There are also other kinds of weightages like equal-value weightage or fundamental weightage. However, they are rarely used by public indices. Click here to read about pledged holdings and prices of equities. Let us take the example of the BSE Sensex to understand how an index is calculated.

Now, we have understood the basics of a stock market like the different kinds of stocks and indices and how the share market works. So let us move on to some company-related financial information in the next section about annual reports.

This is important because you need to analyze stocks and the underlying companies before buying. Reading financial reports will help you garner knowledge about the profitability and invest wisely. Click here. No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment.

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So, let's start by defining them. What are stock market indices? A stock market index is a measurement of the value of a section of the stock market. A stock index, or stock market index, is an index that measures a stock market, or a subset of the stock market, that helps investors compare current price levels.

Video Transcription: Hello, traders. In this lesson, we are going to define what stock market indices are and why they are important for us to monitor them, as stock traders. What are stock market indices? A stock market index is a measurement of the value of a section of the stock market.

There are thousands of companies listed on stock markets, making it almost impossible to monitor each company. This is why stock market indices are created.

A stock index , or stock market index , is an index that measures a stock market , or a subset of the stock market, that helps investors compare current price levels with past prices to calculate market performance. Two of the primary criteria of an index are that it is investable and transparent : [2] The method of its construction are specified. Investors can invest in a stock market index by buying an index fund , which are structured as either a mutual fund or an exchange-traded fund , and "track" an index.

The importance of indices

Indices are crucial for comparing performance against a peer group and support liquidity and capital-raising. For over 30 years, leading asset owners, asset managers, ETF providers and investment banks have chosen FTSE Russell indexes to benchmark their investment performance and create ETFs, structured products and index-based derivatives. A core set of universal principles guides FTSE Russell index design and management: a transparent rules-based methodology is informed by independent committees of leading market participants. FTSE Russell is also focused on index innovation and customer partnerships as it seeks to enhance the breadth, depth and reach of its offering. The Exchange accepts no responsibility for the content of the website you are now accessing or for any reliance placed by you or any person on the information contained on it.

Stock market index

A stock market index is a measure of a stock market, or a smaller subset of the market, that helps investors compare current price levels with past prices to calculate market performance. Investors use the calculated values of stock market indexes as an indicator of the current value of their component stocks, and they can determine returns over time by comparing current and past index levels. Stock market indexes come in many different sizes. Some indexes have only a handful of stocks that determine their value, while others take thousands of stocks into account. You can't invest directly in a stock market index, but by investing in index funds that allow investors to track the performance of those indexes, you can make money and profit when those indexes go up. Stock market indexes make it easier to know how the market is performing without having to follow the ups and downs of every individual stock. They also open up simple investment opportunities that even novice investors can use to participate in the long-term success of the stock market. Reading an index correctly requires that you look at how the index value changes over time.

Stock market indexes around the world are powerful indicators for global and country-specific economies.

An index is an indicator or measure of something, and in finance, it typically refers to a statistical measure of change in a securities market. In the case of financial markets , stock, and bond market indices consist of a hypothetical portfolio of securities representing a particular market or a segment of it. You cannot invest directly in an index. In reference to mortgages, it refers to a benchmark interest rate created by a third party.

The Importance Of Stock Market Indices

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An Introduction to U.S. Stock Market Indexes

If you read or listen to the financial media, you might get the impression that the Dow Jones Industrial Average , usually referred to as the Dow, represents the pulse of the market. These and other reported indexes can give you a good amount of information and insight to use in making more informed investing decisions. First, take a look at what an index number represents. Although there are different ways to calculate index numbers, the numbers always represent a change from an original or base value. The base value represents the weighted-average stock price of all the stocks that make up the index. The index number has much less importance or meaning than its percent change over time. This movement up or down gives you an idea of how the index is performing.