What is the significance of Index?

Index, as name suggests, is an indicator. In case of stock market it tries to indicate the performance (price moments) of overall stocks listed on that particular exchange. Index is generally computed from the prices of a few selected stocks. Financial analysts and investors use index to describe the condition of the market. Index is used as a benchmark to compare returns on various investments. Examples of index are Sensex and Nifty.

Sensex is an indicator of the companies listed on Bombay Stock Exchange. Sensex composed of the top 30 largest and actively traded stocks on Bombay Stock Exchange. Nifty is the benchmark index of National Stock Exchange. It is composed of the top 50 companies on the exchange. The upward movement of Sensex (Nifty) indicates that the price of majority of stocks on BSE (NSE) have gone up. Similarly the downward movement of Sensex (Nifty) indicates that the price of majority of stocks on BSE (NSE) have gone down.

Apart from BSE and NSE we have many regional stock exchanges as well. Ahmedabad Stock Exchange, Bangalore Stock Exchange, Calcutta Stock Exchange and Hyderabad Stock Exchanges are some of the examples. Similarly we have many indices. There are industry specific and category specific indices also. “BSE Midcap index” is an example of category specific index which indicates the price movements of the midcap stocks trading on Bombay Stock Exchange. Similarly “BSE IT Index” is an example of sector specific index which indicates the price movements of stocks falling in IT sector. Similarly we can find indices for other stocks as well.

As mentioned above, index tries to represent majority of the stocks. To achieve this accurately, the value of the index is calculate by using the top stocks, 30 in case of Sensex which have the highest market capitalization. The method used to calculate the value is “Free-Float Market Capitalization Method”. This is one of the widely used methods across various stock exchanges in the world.

Click here for government certification in Accounting, Banking & Finance