Basics of Stock Market - Beginner

Stock Market Index

Stock market indexes are statistical measures that show changes in stock prices. You may have a question that, "How is this index created?" Stocks are grouped together of similar types from securities already listed on exchanges

There are many criteria that can be used to determine stock selection criteria.

  • Type of industry
  • Market capitalization
  • Company size

It is calculated using the stock prices. The index's overall value is affected by any changes in the prices of the underlying stocks. There are two possible outcomes: if most underlying assets prices rise, the index will increase. However, if most underlying asset prices fall, the index will drop. This is how the stock market index measures market sentiments and price movement direction.

You may be asking yourself questions like "What is an index in the stock exchange?" Let's have a look and see why it is necessary.
The stock market index is a barometer, which shows the overall market conditions and assists investors in identifying the general pattern.

Here is a list of India's most notable Stock Market Indexes:

  • Benchmark indices: NSE Nifty, BSE Sensex
  • Broad-based indices: BSE 100 and Nifty 50
  • BSE Small-cap, and BSE Midcap are two types of Indices that are based on market capitalization.
  • Sectoral indices: CNX IT and Nifty FMCG

These are the reasons why indexes are necessary:

  • Stock-Picking Aids
  • Acts as a Representative
  • Comparison of Parameters for Peers
  • Investor sentiment
  • Supports passive investment

How is the index value calculated?

The weighted indexes, which are:

  • Price-weighted index: This method calculates index value based on stock price, and not market capitalization. Stocks with high prices are given a higher weight in the index than those with lower prices.
  • Market-cap weighted Index: This method calculates the company's total stock market value by adding the number of outstanding shares to the current market price for each share. This calculation takes into account both the stock's size and its price.

Now that we've learned about weighted indexes let's take a look at how to calculate the index value.

  • Calculate the total free floating value of the index
  • The base value of an index is the index's total market capitalization at the time it was created.
  • Divide the total free-float market capitalization by the base market capitalization valuation and multiply it with base index
    Please note that the base index value in Sensex is 100.

Index value = (Total market capitalization/Base market capitalization value)*

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