Stock market indices is a procedure of measuring certain stocks. They are used to measure the performance of the certain portfolios.The prime use of the indices is to understand the trends of the market.
How Stock Market Indices are Generated
A stock indices is created by choosing a group of certain stocks. These stocks are able to represent the entire stock market’s trends. They may also represent a specify segment like mutual funds. The changes in the price movements are related to the base period. Their performance shows how the overall market economy or a particular industry is.
Benefits of Stock Market Indices
In stock indices, proper weights are given to the stocks as per their economic importance. The stock market indices are like a barometer of the market. They help the investors to identify the broad trends of the market. Investors use them before allocating the funds among the stocks. The technical analysis uses these indices to forecast the market trends. A general trend of the economy is displayed by the stock indices. Thus, indices act as a guide for the investors.
Indian Stock Market Indices
Stocks are sold and bought in Indian stock market as a group. The mix of various stocks has a number of indexes. These are used to benchmark the performance in terms of the economy. The groups are on the basis of the segment or industry. It can also be on the basis of the company size or some other. To make it clear, BSE 500 is an index of 500 stocks.
Here we have listed some major stock market indices of Indian stock market.
C&P CNX 500
There are broader indices like BSE 500.
The values of these grouped stocks form the basis for calculation of the stock index values. Any up or down in the price of the indices impact the index value.
Importance of Stock Market Indices
Due to many reasons, indices are important. Their ability to reflect the market scenario make them special. The major factors of the stock market indices will self-explain their importance.
Indices segment the stocks of different companies based on different factors. These give an instant sorting to the investors. Just Imagine, how you would search for them in the absence of indices.
A comparative study is easier with indices. Investors can compare certain kind of stocks against another group. This gives company wise or industry wise trends. You will know stocks of which industry are flaring better. Similarly, you will now the trend of the small sized companies. Or the performance of the giant corporate.
Reflection Market Trends
The stock market indices show the position of the whole market or a certain segment. The BSE Sensex and the NSE Nifty are the benchmark indices. They represent the overall market scenario or performance. For example IT stock indices represent the market performance of the stocks of IT companies.
Stock Indices Calculation Methods
Stock indices are calculated using two different methods. The one is a calculation on the basis of market-cap weight age. Second is on the basis of price weight age. Market-cap weight age is the total market value of a stock. It is multiplied by the total number of the shares of the company. This is also known as market capitalization. This calculation changes with the price and number of shares of a company.
Price weight age method calculates the company’s stock price only. In this case, the stocks with the higher value or price have a higher weight age.
Based on the segmentation in the indices, many investors decide their portfolio. Due to indices, invests reduce their cost of research. They are able to decide their investments easily. Indices also construct ETFs and mutual funds.