All about Stock Market Indexes

A hypothetical portfolio of investment holdings is known as a stock market index. It is used to represent a certain area of the financial market. Some indexes (also known as indices) are valued according to market capitalisation, revenue, float, and fundamental weighting. The unique influence of each item in an index is modified through the use of weighting. Indexes have a pole position in the investment management industry. Fund managers use them as the foundation for investable index funds, while funds use them as benchmarks for performance comparisons. Let’s look at stock market indexes in greater detail. 

Market indexes are used to help investors choose the optimal course of action. Post investment, these indexes monitor the performance of the investment assets.

Why do we need an index?

Investors identify broad price trends in the stock market using stock market indexes. These indexes are useful in numerous ways.

Serves as a barometer:

Before making a stock market investment, many domestic and international investors research the index. It serves as a gauge for investors about the economy's health, market liquidity and breadth, among others things.

Aids in stock selection.

This is because there are more than 5,000 publicly traded companies. Without a baseline, it is difficult to distinguish between the stocks.

Acts as a representative:

Investing in stocks is not without its risks. So, relevant and timely information is needed to succeed in the market. However, considering the 5,000-odd listed companies in the market, keeping track of them all becomes difficult.

Helps passive investors:

Indexes help investors who have money but lack the specialised knowledge to cut the expense of their research. 

Top indexes of the Indian Stock Market

Nifty

The Nifty measures the top 50 firms based on volume, market share, performance, and other factors. The top 50 equities across all industries are represented by it. The benchmark indices of the Indian stock market are the CNX Nifty and BSE Sensex. Both indexes display market activity. For instance, if the Nifty falls, it indicates that the Indian stock market as a whole has underperformed.

Sensex

According to market capitalisation, the Bombay Stock Exchange Sensitive Index (Sensex) consists of 30 stocks. From a variety of sectors, these equities are the most frequently traded ones on the BSE. The stock exchange examines the index on a regular basis and alters its composition to reflect the relevant market conditions. The market cap is calculated using the Free-Float Market Capitalization Weighted Technique. 

Conclusion

Investors use market indices as a gauge of market activity. Market indexes are of many types. Investors can buy a basket of assets instead of a single stock using index funds made of market indices.

Investors opt for index investing in a diversified portfolio over individual stock holdings. Investing in a portfolio of index funds is an excellent method of maximising profits while balancing risk. For instance, investors looking to create a well-balanced portfolio of American stocks and bonds decide to split their money equally between an S&P 500 ETF and the U.S. Aggregate Bond Index ETF. Investors can invest in developing growth industries using market index funds.

FAQ

Q. Which are the major stock indices in the world?

The CNX Nifty and BSE Sensex are the two most widely followed indices in India. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite are the top three stock indices in the U.S.. The Financial Times Stock Exchange 100 Index and the Nikkei 225 Index are well-liked substitutes for the British and Japanese stock markets, respectively, on global marketplaces.

Q. Why do investors find indexes useful?

Indexes give investors a condensed view of a sizable market segment without requiring them to look at each and every asset contained in the index. For instance, it would be difficult for a regular investor to analyse hundreds of different stock prices to make investment decisions. The trend for the industry can be seen, though, by looking at a sector-wide index like the S&P BSE Information Technology.

Q. Which US stock index receives the most citations?

The Dow Jones Industrial Average is the oldest and most widely used U.S. stock index. The S&P 500, however, covers a wider swath of the economy.