What is a stock index?
A stock index is an index that measures the stock market of a particular country and with the help of various statistical measures, we can know the change that took place in the stock market. The stock indices of any country represent the value of various securities that have been listed on the stock exchange and they are group together to form an index. If any change occurs in the price of a particular security that is included in the stock index the value of it may increase and decreased in accordance with the change in the price of the security. The group of securities that are included in the index is made on some common criteria like the same industry, market capitalization, size of a company, and so on.
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How does it work?
Stock Index is a group of various security selected on the basis of its size, a particular industry, or its market capitalization. Let say for example if one studies the stock index made with the group of the particular industry then the overall condition of that particular industry can be analyzed on basis of the value of the stock index. If the working of major companies that are selected in the stock index in that particular industry is good and the price of their share is also increased then the value of the stock index will also increase and if the share value of that company decreases then the value of index also decreases. Although the performance of other companies in that industry and the share price of that company has also increased that company is not listed in the stock index no change will be seen in the value of the stock index and this can also be happed is visa ver. case. Thus, it becomes necessary for the investor to study a particular sector and company to earn more return just on the basis of its index value one should not blindly invest in any security.
Example of indices in India and the US
- In India basically, two indexes are considered one is the Bombay Stock Exchange (BSE) which of found in 1875, and the BSE index is a list of top 30 companies which are well established and are financially strong. The BSE index is called Sensex which was published in 1986.
- The other index is NIFTY 50 that comes under NSE i.e. National Stock Exchange. NIFTY 50 is the list of the top 50 companies of India which are well established and financially sound.
In the US there are 3 major indices used to measure the stock market
- S&P 500
S&P 500 is a stock index that considers the group of 500 companies on the basis of their market capitalization and this particular index represent 80% value of the US stock exchange.
- Dow Jones Industrial Average
This index is considered one of the oldest stock indexes in the US. Under this index to 30 most influential companies are grouped together.
Nasdaq is an electronic stock exchange developed in the US for the trading of security through online mode with the help of the internet.
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Why do we need indices?
Stock indices are required to know the movement of the market and it acts as a barometer that analyzes the overall condition of the market. This helps various regulators to take a corrective step if the market continuously moves in a negative direction and also helps the investor to make various decisions to invest in which security and in which sector. On the basis of selection criteria of various securities that form an index the performance of various sectors can also be studied individually. Investing in the stock market is always risky but it becomes impossible to invest if any parameter is no set because an individual alone cannot study the whole market and the index provide various information which helps to analyze various security. With the help of it, future returns from the security of a particular sector can be analyzed and risk can be minimized. Thus, the requirement of the stock indices is must know the performance of the market and its help the public to make a decision whether to make an investment in it or not.
It describes the country’s economic condition at the world level there are various speculation activities going on in the stock market by which imaginary ups and downs are seen in the market and if any unnatural situation occurs in any country the change in its index is seen. Because of COVID-19, a global change was seen on the stock index of every country and as and when the situation of COVID-19 was made under control and working of economy stared by various countries the change in the index of a various country is seen in a positive way. Thus, it is a common measure to know the performance of various sectors in any country.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing MBA with the specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated about financial market.