Stock Market Indices
Introduction::
In the Indian Stock Exchange, many companies are listed. For a normal investor, it is impossible to track each and every listed company. To simplify this, a better approach is to track the movements of the top companies on the exchange. If these companies’ movements are upward you can say that the market is performing well and if movements are downward, you would say that markets are not performing well. The selection of these companies makes the stock market indices.
There are several important indicators for checking stock market performance, but one of the most fundamental and important indicators is Stock market indices. It shows the performance of the whole stock market or a particular sector of the stock market like the banking sector or IT sector, etc.
हिंदी : इस लेख को हिंदी में पढ़ें ।
Meaning::
A stock market index is made by choosing equities from similar companies or those that match a predetermined set of criteria. These shares are already listed on the exchange and traded. Broad market indices show the behavior of the stock market as a whole or the top stocks in the market. Sector market indices show specific sectors of the market like Bank indices or IT indices.
Each Stock market index comprises a group of companies whose stocks are traded on the stock exchange. Since the index measures the movement and performance of the shares of its companies which are included in the indices, this only means that index performance is directly proportional to the performance of the including stocks. In simple words, if the price of the stocks in a particular index rose, corresponding indices rose too.
Stock indices are often used as a standard to evaluate the performance of individual stocks, mutual funds, or exchange-traded funds (ETFs). Investors and traders closely follow these indices to monitor market trends and accordingly make investment decisions.
Why Indices Are Needed?
Benchmarking – As we have already discussed, index movement and performance are directly proportional to the movement and performance of including stocks of the indices. Many investors and market participants use the performance of the indices as a benchmark to analyze their investment performance in the stock market.
Market analysis – Indices help investors and traders easily track market movements, with an in-depth analysis of indices one can determine whether the market is going upwards(bullish) or downwards(bearish) and take their investment decision accordingly.
Diversification – Indices provide an easy way to diversify their portfolio. By investing in an index fund investors can reduce their risk because of diversification.
News and media – With the help of indices news and analysts can easily describe the market movements and economic changes.
Types of Stock Market Indices
Broad Market Indices – These indices cover the overall performance of large sections of the stock market like Sensex and Nifty.
- BSE Sensex index: Comprises the top 30 largest and best-performing stocks of BSE(Bombay Stock Exchange)
- Nifty 50 index: Comprises the top 50 largest and best-performing stocks of NSE(National Stock Exchange)
Sector-Specific Indices – These indices cover the performance of specific sectors of the stock market like Banking, Technology, etc.
Market Cap Indices – These indices include companies based on their market capitalization like NSE Small Cap 50.
