Stock market indices indicate a specific collection of shares selected based on particular criteria like trading frequency, share size, etc. The sampling technique is used in the stock market to depict market direction and change through an index. To understand the basic question that what is Stock Market Indices, let us see what it is.
What are the Stock Market Indices and their Meaning?
A stock market indices is a statistical tool that reflects the changes in the financial markets. The indices are performance indicators that indicate the performance of a certain market segment or the market as a whole. A market index is a hypothetical portfolio of investment holdings that represents a segment of the financial market. The index value calculation comes from the underlying holdings' prices. It serves as a benchmark to see the performance of a particular stock or a portfolio's performance.
Investors follow different market indices to gauge market movements. The three most popular stock indexes for tracking the performance of the U.S. market are DOW JONES Industry Average, S&P 500 and NASDAQ in India Sensex and NIFTY. In UK FTSE, Russia MOEX, RTSI, in Japan Niekei ,etc
This essentially means that the performance of any stock market index is directly proportional to the performance of the underlying stocks that make up the index. In simpler terms, if the prices of the stocks in an index go up, that index, as a whole, also goes up.
What is the Usage of Stock Market Indices?
Share market indices are used to track the overall performance of a particular market or a specific segment of the market. For example, the Nifty 50 index in India tracks the performance of the top 50 companies listed on the National Stock Exchange (NSE), while the S&P 500 global stock market index in the US tracks the performance of 500 large-cap companies listed on the New York Stock Exchange (NYSE) or the Nasdaq.These three indexes include the 30 largest stocks in the U.S. by market cap, the 500 largest stocks, and all of the stocks on the Nasdaq exchange, respectively. Since they include some of the most significant U.S. stocks, these benchmarks can be a good representation of the overall U.S. stock market. Indexes can also be created to represent a geographic segment of the market such as those that track the emerging markets or stocks in the United Kingdom and Europe. The FTSE 100 is an example of such an index.Benchmark indices such as BSE Sensex and NSE Nifty
Broader indices such as Nifty 50 and BSE 100
Indices created based on the market capitalization of companies, such as BSE Midcap and BSE Smallcap
Sector-specific indices like Nifty FMCG, Nifty Bank Index, CNX IT, and S&P BSE Oil and Gas
Types of Stock Market Indices
Share market indices can be classified into different types based on the methodology used to calculate the index.
a) Sectoral Index
Both the BSE and the NSE have some strong indicators that gauge companies in a given sector. Indices like the S&P BSE Healthcare and NSE Pharma are known to be good indicators of changes in the pharmaceutical sector. Another notable example is the S&P BSE PSU and Nifty PSU Bank Indices, which are indices of all listed public sector banks. However, neither exchange is required to have equivalent indexes for all industries, yet this is a key cause in general.
1. Price Weighted Index
This type of index gives more weightage to stocks with higher prices. The stock with the highest price gets the highest weightage, and its price movements have a greater impact on the index. Examples of price-weighted indices include the Dow Jones Industrial Average (DJIA).
2. Market Capitalization Weighted Index
In this type of index, the weightage of each stock is based on its market capitalization. The larger the market capitalization of a stock, the higher its weightage in the index. Examples of market capitalization-weighted indices include the NIFTY 50, BSE Sensex, and S&P 500.
3. Equal Weighted Index
This type of index gives equal weightage to all the stocks in the index. It does not consider the market capitalization or price of the stocks. Examples of equal-weighted indices include the S&P 500. It’s a global stock market index.
4. Benchmark Index
The Nifty 50 index, which consists of the top 50 best-performing equities, and the BSE Sensex index, which consists of the top 30 best-performing stocks, are indicators of the NSE and the Bombay Stock Exchange, respectively. This group of equities is known as a benchmark index since they employ the best standards to regulate the companies they select. As a result, they are regarded as the most reliable source of information about how markets work in general.
Investors often choose to use index investing over individual stock holdings in a diversified portfolio. Investing in a portfolio of index funds can be a good way to optimize returns while balancing risk. For example, investors seeking to build a balanced portfolio of U.S. stocks and bonds could choose to invest 50% of their funds in an S&P 500 ETF and 50% in a U.S. Aggregate Bond Index ETF.
Investors may also choose to use market index funds to invest in emerging growth sectors. Some popular emerging growth indexes and corresponding exchange-traded funds (ETFs) include the following:
The iShares Global Clean Energy ETF (ICLN), which tracks the S&P Global Clean Energy Index
The First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT), which tracks the Nasdaq CTA Artificial Intelligence and Robotics Index.
Conclusion
So, Stock Market Indices combine several stocks to create one aggregate value that investors useful for measuring a market’s (eg: Bombay Stock Exchange and National Stock Exchange, NASDAQ, STT, FTSE, etc), or a sector’s (eg: energy, infrastructure, real estate) performance. In the Indian context, there are two major stock market indexes used for evaluating markets: SENSEX and NIFTY. Indian investors can track changes in these index values over time and use it as a benchmark against which to compare their own portfolio returns.FAQ
1)What are the top 3 market indices?1. DOW JONES
2. NASDAQ
3. NYSE
2)WHAT IS THE LARGEST INDICES IN INDIA?
NIFTY 50
NIFTY Midcap 50
NIFTY VIX
3)How many global indexes are there?
