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STOCK MARKET INDEX/INDICES
What Are Stock Market Index/Indices?
A statistical tool that reflects changes in the financial markets is a stock market index. The indexes serve as performance indicators for either a specific market segment or the entire market.
A stock market index is made by selecting particular stocks from related companies or those that satisfy a set of specified requirements. The exchange already lists and trades these shares. A number of selection criteria, like industry, market sector, or market capitalization, can be used to generate stock market indexes.
Every stock market index tracks the performance and price changes of the stocks that make up that index. This effectively means that any stock market index's performance is inversely correlated with the performance of the underlying stocks that comprise the index. To put it another way, if the stock prices in an index increase, so does the index overall.
Index Concepts
In the world of investing, however, risk is indissociable from performance and is simply essential rather than being either good or bad. One of the most crucial components of a financial education is the understanding of risk.
Significant advantages are offered by indices and index-linked investment products. The related risk that comes with such exposure, however, must also be understood. Indices are linked to significant terminologies and concepts. Beta, for instance, enables us to comprehend the ideas of passive and active risk. Impact cost is the price associated with carrying out a transaction in a given stock, for a particular predetermined order size, at any given moment. Comprehension indices and investing opportunities requires an understanding of these concepts.
What are the types of Stock Market Indices?
The following list of stock market indices includes three major categories:
Benchmark Indices
Sectoral Indices
Market-Cap Based Indices
Broader indices such as Nifty 50 and BSE 100
Benchmark Indices:
Nifty 50, which captures the top 50 performing equities, and BSE Sensex, which captures the top 30 performing stocks, are the respective indicators of the National Stock Exchange and Bombay Stock Exchange.
Because they select companies that belong to the highest standards, this group of equities is referred to as a benchmark index.
As a result, they are regarded as the best source of information about how markets behave in general.
Benchmark indexes are used to compare a set of equities' performance to that of other stocks and securities traded on the market. NIFTY 50 and BSE SENSEX are considered benchmark indices. They are thought to be the best resource for informing investors about the state of the market.
Sectoral Indices:
There are certain reliable indicators that measure businesses that come under a particular sector on the BSE and NSE.
S&P BSE Healthcare and NSE Pharma indexes are regarded as reliable predictors of the corresponding changes in the pharmaceutical industry.
The S&P BSE PSU and Nifty PSU Bank Indices, which are indices of all the listed public sector banks, could serve as another notable example.
The existence of matching indices for all sectors on both exchanges is not a must, although it is typically a major one.
Stocks from several industries, such as S&P BSE Healthcare, Nifty PSU Bank, and Nifty FMCG, are included in sectoral indices. In this case, the performance of the sectors is used to measure stock performance.
Market-Cap Based Indices:
Only a small number of indices select companies based on market capitalization. Market capitalization refers to the stock market market value of any publicly listed corporation.
According to the guidelines established by the Security Exchange Board of India, lower market capitalization companies are included in indices like S&P BSE and NSE small cap 50. (SEBI).
Market-Cap indices, sometimes referred to as Market Capitalization Indices, are indices where companies are selected based on the market valuation. BSE Midcap and BSE Smallcap are two instances. (BSE smallcap comprises companies with market capitalizations ranging from as little as Rs 10 crore to Rs 27000 crore, whereas BSE midcap refers to an index where companies with a market capitalization ranging from approximately Rs 5650 crores to roughly over Rs 87,350 crores are included.)
Other Indices:
Other indexes, such the S&P BSE 500, NSE 100, and S&P BSE 100, among others, are a little bigger and have a bigger number of stocks listed on them.
You might want little risk, whereas stocks listed on the Sensex might prefer high risk. Not every demand is catered for by investment portfolios. In order to invest, a person must be focused and feel secure doing so.
Why are stock market indices used?
A number of factors make stock market indices valuable.
Some of these include:
They offer a historical comparison of stock market returns to those of other types of assets like gold or debt.
They can be used as a benchmark to assess how well an equity fund has performed.
In It serves as a leading indicator of how well the economy as a whole or a particular sector is performing.
Modern financial products like Index Funds, Index Futures, and Index Options play a significant role in financial investing and risk management. Stock indexes reflect highly current information.
You may get a rough idea of the state of the stock market by monitoring the most popular stock market indexes.
Tracking unusual indexes can help you determine how one market segment compares to the whole market.
About Indices
An index is a tool that provides information about market price changes in the financial, commodities, and other markets. Stock, bond, T-bill, and other types of investment price changes are tracked by financial indexes, which are developed specifically for this purpose. Stock market indices are designed to reflect the general trends in the equity markets. The process of choosing a collection of stocks that are indicative of the entire market or a specific industry or market segment results in the creation of a stock market index. A base period and a base index value are taken into consideration while calculating an index.
HOW ARE STOCK INDICES CREATED?
Similar stocks make up an index. This could be based on the sector, the size of the company, the market capitalization, or another factor. The index value is determined after the stocks have been chosen. This might just be the sum of the component prices. In India, the free-float market capitalization is frequently utilized to determine an index's value instead of prices.
The two most common kinds of indices are –
Price-weighted and
Market capitalization-weighted index.
Price weightage:
This method is used to determine an index value based on a company's stock price rather than market capitalization.
Higher priced equities are given more weight in the index than lesser priced stocks. Examples of price-weighted indices are the Dow Jones Industrial Average in the US and the Nikkei 225 in Japan.
Other weighting types include equal-value weighting and fundamental weighting. However, public indices hardly ever employ them.
Market-cap weightage:
Market capitalization is the total market value of a company’s stock. This is computed by dividing the share price of each stock by the overall number of shares that the firm has floated. Thus, it takes into account both the stock's size and price. Stocks are given weightage in an index that uses market-cap weighting based on their market capitalization in relation to the index's overall market capitalization. The weight of Stock A will be 10%, for instance, if its market capitalization is Rs. 10,000 and the index it is a component of has a total m-cap of Rs. 100,000. A similar weighting of 50% will be applied to another stock with a market capitalization of Rs. 50,000.
The important thing to understand is that market capitalization varies on a daily basis as stock prices move. A stock's weight varies daily as a result of this. However, it usually only makes a small difference. Additionally, the market capitalization-weightage strategy prioritizes businesses with greater m-caps.
The majority of indices in India employ free-float market capitalisation. In this method, the number of publicly traded shares is utilized to determine market capitalization rather than the total number of shares a firm has listed. Free-float market capitalization is therefore less than market capitalization.
What is stock weightage?
The price of each stock is unique. Therefore, a price change of 1% in one stock might not equal to a price change of 1% in another one. As a result, the index value cannot simply be the sum of the stock prices. The idea of stock weightage comes into play in this situation. Depending on its price or market cap, each stock in an index has a specific weight. This represents the degree to which a change in stock price affects index value.
Major Stock Market Indexes
In the world of investment, there are countless indexes. The most frequent indexes you'll probably see are listed below to help you get started:
The Dow Jones Industrial Average
The DJIA has a slightly limited range because it only monitors the performance of 30 U.S. corporations that S&P Dow Jones Indices has chosen. The equities that make up the DJIA are blue chip stocks, which are common across a variety of industries, including technology and healthcare. This implies that they have a track record of excellent financial performance. One of the few price-weighted market indices is the DJIA.
The S&P 500 Index
The S&P 500, one of the most well-known indices, measures the performance of 500 of the best U.S. corporations as chosen by a committee at S&P Dow Jones Indices. An index that is weighted by market capitalisation is the S&P 500.
The Nasdaq 100
The performance of 100 of the most popular and largest stocks listed on the Nasdaq Stock Exchange is tracked by the Nasdaq 100. Companies listed on the Nasdaq can be found in a wide range of sectors, but they tend to focus on technology and exclude anyone from the financial industry. Market-cap weighting is used in the Nasdaq 100.
The NYSE Composite Index
An comprehensive index that measures the performance of all equities traded on the New York Stock Exchange is called the NYSE Composite Index (NYSE). Modified market capitalization weighting is used for the index.
The Russell 2000 Index
The Russell 2000 tracks the performance of 2,000 of the smallest publicly traded domestic companies, unlike other stock market indices that concentrate on the biggest businesses in a given sector. A market capitalization-weighted index, the Russell 2000 is calculated.
The Wilshire 5000 Total Market Index
The performance of the whole U.S. stock market is monitored by the Wilshire 5000 Total Market. The weighting of the index is determined by market capitalization.
