What Is a Market Proxy?
A proxy is a group of stock in a particular class and a combination of their performances into an index for analysis. Its role is similar to that of a thermometer as it measures the health of a company in that group. The broad representation of an overall stock market is known as a market proxy. It is a part of statistical analysis and portfolio modeling. Market proxies are a benchmark for comparing the performances of a stock to a market. They are also used to calculate the investment returns.
Get complete FRM Online Course by experts Click Here
How Does Market Proxy Work?
The main objective of the Market Proxy is to assist in determining the risk of specific assets in terms of market trends. S&P 500 is a broad proxy of the stock market which works on the basis of the market cap of 500 large companies which are traded on NYSE and NASDAQ. In a market cap, the stock price is multiplied by its outstanding equity shares and thus S&P 500 favors large companies as they have more outstanding shares. This results in large companies having a greater impact on the market index. As stated earlier, the proxy functions similarly to a thermometer, assessing the overall wellbeing of various businesses. Hence, when the market is doing well, the proxy usually rises. The proxy index would collapse when the businesses perform badly.
How they are Classified?
A market index is an example of Market proxies. They are classified as an index such as:
- S&P 500
- Dow Jones Industrial Average
- NASDAQ Composite
- EGX 30
Get complete CFA Online Course by experts Click Here
Why it is used?
- A proxy is a convenient way to determine how companies in a specific industry are doing on a regular basis.
- It helps analysts and investors in creating portfolios and analyzing the statistics.
- It is used for comparing the stock performances with that of a market.
- It is useful in determining the risk of certain assets based on general trends in the market.
Market Proxy is a base for index funds or statistical studies. Its main purpose is to serve as a variable in the calculation of market sectors mainly to gauge the performance of a stock against market movement. It does not reflect the entire price movement of market sectors as it is just a theoretical representation. Therefore, it’s crucial to identify a proxy that accurately represents the business sector in which you’re involved when it comes to equity investment. The proxy won’t provide you a reliable output measurement otherwise.
Author: Urvi Surti
About the Author:
Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).