The world of share market investments and trading can be overwhelming, especially if you are
just starting out. With so many stocks to choose from and the markets in constant flux, deciding
what to do can be hard. That’s where stock market indices can help.
Stock market index: Basics
A stock market index is a measure comprising a collection of listed stocks which reflect current
market trends. The stocks that make up the index may be selected on the basis of various factors.
Company size, stock price, and sector are some examples. Some indices even mirror overall
trends in the country.
An example of an Indian stock market index is Sensex of the Bombay Stock Exchange (BSE).
Another index is Nifty of the National Stock Exchange (NSE). Both Sensex and Nifty are
benchmark indices that reflect the overall conditions in the Indian stock market.
Reasons to use a stock market index
Since stock market indices reflect trends in either the whole market or specific areas, they can
inform your trading and investment plans in several ways:
- Stock selection: Struggling to pick a few stocks out of the thousands on the share
market? Use a benchmark index to assess stocks across different sectors, company sizes,
and so on.
- Trend assessment: Examining multiple stock trends is time-consuming. Stock market
indices give you a picture of overall trends quickly. For example, an index which tracks
technology stocks should portray average stock prices within the sector.
- Peers comparison: When selecting a stock, check if its returns exceed those of the
related index. This suggests the stock is outperforming the index. Skip the stock if it
brings lower returns than the index.
- Market sentiment: Stock market indices help you gauge how investors are responding to
certain stocks. You can then assess why a stock is moving in a certain way.
- Passive investment: You could invest in a professionally managed index fund or create a
portfolio that replicates the underlying stocks of a well-performing index.
Stock market index weightage
Once a set of stocks is selected for a stock market index, weightings may be given to individual
stocks based on their overall impact on the group. Some indices give weightage based on market
capitalisation (company size). A larger company is given higher weightage. Other indices may
add weightage based on the stock price. The higher the price, the greater the weightage.
Reading a stock market index
When the market opens, the index will have a particular value. This may change by market close.
Study how the index value changes over time to get a sense of how prices of the underlying
assets increase or decrease over the same period.
Any change in the stock index value is measured in points. When comparing indices, don’t focus
on just the number of points gained or lost. Look instead at the percentage of increase or
decrease to get a clearer picture of the index’s performance.
Stock market indices can help you to find your footing in the market. And there are all kinds of
indices available in the markets today. While the benchmark indices give you a picture of overall
stock market health, more niche indices can provide data about specific groups of stocks. If you
need further guidance, open an account with a broker like Kotak Securities that provides a wealth
of stock market tips, research, and articles.