Have you ever followed the stock market? If yes, then you must have noticed that the stock market ‘falls’ at times and it ‘rises’ at other times. Nevertheless, if you carefully analyze the table of stocks, you will realize that not all individual stocks rise or fall on a given day.

In fact, as opposed to the status of the stock market on a particular day, the prices of the stocks may even move in the opposite direction. Here, the question may arise that “what does the ‘market’ mean?”. The answer is, it means ‘stock index’.

What are stock market indices?

A stock market index refers to the statistical measure of the change in the stock market. Stock indices comprise of a hypothetical portfolio of stocks that represent a particular industry or a segment of that industry. These indices are used to evaluate the performance of a part, or the whole of the stock market and determine its return on investment.

How are stock market indices formed?

A stock index comprises of similar stocks. It is formed by segregating similar stocks from all the stocks listed on the stock exchange. The classification of the stocks may be made on the basis of the size of the companies, price of stocks, market capitalisation, the industry to which the companies belong, or any other parameter deemed fit.

Why are stock market indices needed?

Stock market indices are important because of the following reasons:
  • In the stock market, companies and their stocks are categorised into indices based on different characteristics. This helps an investor to classify the stocks and buy those that he/she deems fit.

  • A stock index represents a particular segment of the stock market and its overall market performance. It helps investors to make informed decisions regarding which stocks to buy.

  • Stock indices make it easy for investors to compare the performance of different sets of stocks and decide which stocks to buy.

  • Stock indices help in gauging investor investment, which in turn represents if a stock is in demand or not. This also helps in reflecting whether a stock has outperformed or underperformed.

  • Stock indices promote passive investment, in which investors who are not interested in extensive research for stock selection rely on the index to invest in stocks.

Important stock indices in India

Some of the important stock indices in India are Benchmark indices (NSE Nifty and BSE Sensex), Sectoral indices (CNX IT and BSE Bankex), Broad market indices (BSE 100 and BSE 500) and Market capitalization-based indices (BSE Midcap and BSE Small cap).

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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