How is a stock index created?A stock index is created by choosing a few similar stocks and grouping them together. The criteria for choosing stocks can be either market capitalisation or type of industry. A change in the underlying price of the stock can affect the index’s value. Any rise in price of the securities will bolster the index and vice versa. Some of the most popular stock market indices in India are:
- BSE Sensex
- NSC Nifty
- Nifty 50
- BSE 100
Requirement of stock indexSo, what’s the need for a stock index? Well, a stock index reflects the overall sentiments prevalent in the market. They help investors identify the market patterns and help investors in choosing the stock they wish to invest in.
Some of the other reasons for having a stock market index are:
- Helps in picking the right stock There are several thousand stocks listed in the stock exchange. For investors, it can be difficult to select the right stock without an index. In other words, the presence of a stock index helps to sort the right stock for the investor.
- Fill knowledge gaps Stock market investment, just like any other investment, carries an element of risk. Therefore, it’s imperative for investors to make an informed choice. Knowing and studying about each stock is next to impossible. This is where a stock index comes handy as it fills the knowledge gaps which exist among investors. With the help of an index, an investor can know the trends of the market or a certain sector and choose accordingly.
- Judge the performance of a stock When you invest in a stock, it’s imperative for you to analyse its performance. The stock market index helps you do exactly that. When a stock gives higher returns than the index, it’s said to have outperformed it. On the other hand, when it gives lower returns, it’s said to have underperformed.
- Helps gauge investors’ sentiment Investors’ sentiments play a crucial role in stock market investing. A positive sentiment the demand for a stock, which impacts its overall price. An index helps you know the mood of the investor and recognise its sentiment towards a particular sector.
For retail as well as seasoned investors, the movement of index plays an important role in stock selection and investment. Today, there are many portals that help you track the movement of stock on a real-time basis.
Click here to open an online trading account.
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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