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Stock Market Indices Basics

Stock Market Indices Basics

1.Stock Market Index: It is representative of the entire stock market. Movements of the index represent the average returns obtained by investors in the stock market. A base year is set along with a basket of base shares. The change in the market price of these shares is calculated on a daily basis. The shares included in the index are those shares which aetraded regularly in high volume. In case the trading in any share stops or comes down then it gets excluded and another company’s shares replaces it.

Each stock exchange has a flagship index like in India, Sensex of BSE and Nifty of NSE and outside India is Dow Jones, FTSE etc.

Stock Market Indices Basics

2.Concept behind Fluctuations of Index: Stocks are valued by discounting future earnings of a company; therefore, stock indices reflect expectation about future performance of the companies listed in the stock market or performance of the industrial sector. When the index goes up, the market thinks that the future returns will be higher than they are at present and vice versa.

Stock prices are sensitive to Company specific news and Country specific news (which includes budget, elections, government policies, wars and so on)

Stock Market Indices Basics

3.Computation of Index: .

Following steps are involved in calculation of index on a particular date:

• Calculate market capitalization of each individual company comprising the index.

• Calculate the total market capitalization by adding the individual market capitalization of all companies in the index.

• Computing index of next day requires the index value and the total market capitalization of the previous day.

• It should also be noted that Indices may also be calculated using the price weighted method.

Here the share the share price of the constituent companies form the weights. However, almost all equity indices world-wide are calculated using the market capitalization weighted method.

Stock Market Indices Basics

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