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Hello and welcome friends. What is index in stock market? a stock market index basically is a measurement of a portion of the stock market. It chooses a set of liquid stocks, which tend to be market leaders of the economy and best represent the economy. The two main parameters that are checked are whether they are investible and transparent or not. This index in stock market might be for the economy as a whole or based on sectors. A national index represents a performance of the stock market of a given country. It also reflects the sentiment of the investor in the economy. Some of the examples of stock market index across the world are America’s S&P 500, Nikkei of Japan, Nifty 50 of India, and UK’s FTSE 100.

The importance of a stock market index are as follows: The market index gives a historical indication of the performance of stock market performance, giving investors more insight into their investment decision. Investors who do not know which individual stocks they could invested can use the stocks that are a part of the index. The index also gives a yardstick to the investors through which they can compare their own individual portfolios. If an investor is getting his funds managed through a fund manager, he or she can compare to the benchmark and see whether the stock is creating alpha for the investor or not. The stock market index can be used as a forecasting tool. It can be used to forecast trends in the market. Thus, we can see that a stock market index is a statistic, which shows the changes that take place in the stock market. To create an index a few industries and similar stocks are chosen, which best represent the economy.

The criteria of stock selection could be market capitalization, size of the company or the type of industry. Once the stocks are selected, the index value is computed, each stock has a different price, and the prices change in one stock will not be proportionately equal to the price change in the other. It is to be noted that a simple sum of the prices of all stocks will not be used for arriving at the index value. Yup. Each stock is allotted a weight depending on the market capitalization or its price. The weight shows the extent of the impact that the stocks price change has on the value of the index. There are two main ways to compute this, one is market cap weightage. Market cap is computed by multiplying the free float shares of a company by total number of outstanding shares. Suppose a stock has a market capitalization of 30,000 and the underlying index as a market cap of one lakh, then the weightage given to the stock will be 30%. Market gap of a stock changes every day due to the swings in the market price because of this weightage of the stock will change daily. The second method is Price Weightage, here the Index value is calculated based on the stock price of a company instead of market capitalization, the stocks which have higher prices will have higher retention in the index, hope that you found the video useful.

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