The stock market index is the most important indices of all as it measures overall market sentiment through a set of stocks that represents a market. This index is a measuring tool of market attitude. It reflects market direction and indicates day-to-day stock price fluctuations. The stock market index indicates future about the behaviour of the economy, you as a whole. It is a precursor of financial phase. The purpose of a stock market index is to offer investors with information regarding the average share price in the market. A well-constructed index captures the overall behaviour of the market and represents the return obtained by a typical portfolio investing in the market. A ideal index must represent changes in the prices of scrips and reflect price movements of typical shares for better market representation. Stock index is a barometer of a nation’s economic health as market prices reflect expectations about the company’s performance. Stock market tend to be buoyant when the economy is expected to do well. The bell whether Sensex, if it touches 21,000 mark (presently over 20,000 mark), indicates that the country’s financial and economic growth is surging ahead.
what is stock market index
Stock indexes are known as major economic signs as they indicate what is going to happen in the economy position in the future. The profits made in the stock market are based on upcoming objectives. The long run sources of predicted profits from the companies are reduced to reach their present value recognised as market rate.
Sound market indexes has a set of scrips which have great industry capitalisation and great assets. Market capitalisation is the sum of the market value of all the shares included in the indexes. The market value is achieved by multiplying the cost of the share by the number of outstanding equity shares. Liquidity is shown in the ability to buy or sell a scrip at a cost close the current rate. In other words, the bid-ask difference is minimum.
The index on day is calculated as the percentage of the aggregate market value of the set of scrips incorporated in the index on that day to the average market value of the same scrips during the base period. For example, the BSE Sensex is a weighted average of prices of 30 select stocks and S&P CNX Nifty of 50 select stocks.
There are two major indices in India. BSE Sensex and NSE Nifty. The BSE Sensitive Index of equity share prices was launched in 1986. It comprises 30 shares and its base year is 1978-79. The major criterion for selection of script in the Sensex is large market capitalisation. Besides this criterion, other criteria like number of trades, average value of shares traded per day as a percentage of total number of outstanding shares are considered for inclusion in the Sensex. The scrip selection is also based on a balanced representation of the industry, leadership position in the industry, continuous dividend-paying record , and track record of promoters.
Another index which has become very popular in a short span of time is the S&P CNX NIFTY. The NSE began equity trading in November 1994, and its volumes surpassed that of the BSR in a very short span of time. The NSE and CRISIL undertook a joint venture, wherein they jointly promoted India Index Services and Products, a specialised organisation to provide stock index services. This organisation developed scientifically devised indices of stock prices in the NSE is technical partnership with Standard & Poor (S&P). The NSE introduced this index to reflect the market movements more accurately, provide fund managers with a benchmark for measuring portfolio performance, and develop a reference rate for introducing index-based derivative products. The S&P CNX NIFTY launched on 8 July 1996, comprises 50 scrips which are selected on the basis of low impact cost, high liquidity, and market capitalisation. The impact cost is the percentage marking from the (bid+ask)/2 suffered in executing a transaction. Lower the impact cost, higher the liquidity of a stock and vice versa.
Both BSE and the NSE use the weighted average method method of averaging, whereby each stock is given a weight in proportion to its market capitalisation. Suppose an index contains two stocks, A and B. If A has a market capitalisation of Rs.3,000 crore and B has market capitalisation of Rs.1,000 crore then a 75% weightage is attached to the movements in A and a 25% weightage to the movements in B.