A Stock Market Index tracks the performance of a section or the entire stock market by measuring price movements of a chosen sample of shares. Widely tracked indices are made up of the most actively traded and investible equity shares in the country. The stock tips providers often use the information depicted by these indices to generate valuable recommendations.
Equity stock indices such as Dow Jones Industrial Average (DJIA) and S&P 500 (for USA); FTSE 100 (UK); Nikkei (Japan); Hang Seng (Hong Kong); and Nifty 50 and S&P BSE Sensitive Index (Sensex) (India) are considered to be representative indices. In addition, sector specific indices that focus on shares from a specified industry or size of market capitalization or any other grouping are useful for sector analysis and investment. An index usually tracks the price of a chosen set of equity shares. The components are chosen based on the focus of the index. Sensex and Nifty 50 for example, track the prices of 30 and 50 largest and most liquid equity shares on BSE and NSE, respectively.
Stock market index
The simplest way to compute an index is to add up the prices of constituent shares at a point of time and divide by the number of shares to create an average. However, an index based only on share prices would be heavily influenced by large price changes in a single stock, even if that stock belongs to a company that is relatively smaller or less significant in the overall market. To avoid such biases, share prices are weighted by market capitalization of the component stocks. The index then represents the collective market capitalization of index stocks at a point in time.
An index is always calculated with reference to a base period and a base index value. This ensures that trends in index movements are always measured relative to a base level.
A stock market index has several uses:
- Indices are widely reported in the news, financial press and electronic information media and thus real-time data on market movements is easily available to the investing public and the stock option tips providers.
- The index value is a leading indicator of overall economic or sector performance and effectively captures the state of financial markets at a point of time. This helps in generating Intraday trading tips via fundamental and technical analysis.
- A representative index serves as a performance benchmark. The returns earned by the equity-linked mutual funds or other investment vehicles are often compared with the returns on the market index.
The most widely tracked indices in India are the S&P BSE Sensitive Index (Sensex) and the Nifty 50. The Sensex has been computed since April 1, 1979 and is India’s oldest and most tracked stock index. The base value of the Sensex is 100 on April 1, 1979. The composition of stocks in the Sensex is reviewed and modified by the BSE index committee according to strict guidelines in order to ensure that it remains representative of stock market conditions. The criteria for selection of a stock in the Sensex include factors such as listing history, trading frequency, market capitalization, industry importance and overall track record.
The Nifty 50 is an index composed of 50 most representative companies’ stocks listed on the National Stock Exchange. The base period for Nifty 50 is November 3, 1995, and the base value of the index has been set at 1,000. The selection of shares that constitute the index is based on factors such as liquidity, availability of floating stock and size of market capitalization. The index is reviewed every six months and appropriate notice is given before stocks that make up the index are replaced.
The SX40 is composed of 40 most representative stocks listed on the Metropolitan Stock Exchange of India Ltd.. The base period for SX40 is March 31, 2010 and the base value of the index has been set at 10,000. SX40 is a free float based index consisting of 40 large cap liquid stocks representing diversified sectors of the economy.