According to investopedia –
“An index is an indicator or measure of something, and in finance, it typically refers to a statistical measure of change in a securities market. In the case of financial markets, stock and bond market indices consist of an imaginary portfolio of securities representing a particular market or a portion of it.”
In simple terms an index is a barometer to check whether the stock market as a whole or the economy of any country is on positive side or being negative. I guess, you must have heard of people saying like “today the market is up or today the market is down”. Well, they mean how the index is doing? Generally, index and markets are used interchangeably in stock market. And nasdaq, dow jonmes, shanghai, dax,cac, sensex and nifty50 are all examples of popular stock market indexes all over the world. beside these indexes there are many indexes which represent only one type of industry so that investors can determine whether they have to invest in that particular industry or not. If the index of that industry is doing well , they will invest their money otherwise they will find another .
Some important indexes in India:
- BSE SENSEX
- NIFTY 50
- CNX NIFTY JUNIOR
- S&P CNX 500
SOME IMPORTANT USE OF INDEX:
- They help us to find the broad trend in the market by keeping track of the whole market.
- Can be used as a benchmark to evaluate the investor’s portfolio.
- Allocate the funds rationally among stocks.
- Helps in comparison of returns.
- Acts as a basis of index fund.
HOW A COMPANY IS SELECTED TO BE LISTED ON INDEX?
The selection criteria of a company to be listed on a index depends on various factors such as :
- MARKET CAPITALIZATION
- VOLUME etc.