Stock Market Indices Introduction - Security Analysis and Investment Management

Stock Market indices are the barometers of the Stock Market

Index numbers are termed as barometers of economy as they mirror the relative changes taking place in various economic indicators like GDP, exports, prices, etc. similarly stock market indices are the barometers of the stock market. They reflect the stock market behavior. With some 7,000 companies listed on the Bombay stock exchange, it is not possible to look at the prices of every stock to find out whether the market movement is upward or downward. The indices give a broad outline of the market movement and represent the market. Some of the stock market indices are BSE Sensex, BSE- 200, Dollex, NSE-50, CRIOSIL-500, Business Line 250 and RBI indices of Ordinary Shares. Usefulness of indices would be clear from the following points:

  1. Stock market indices help to recognize the broad trends in the market.
  2. Stock price index can be used as a benchmark for evaluating the investor’s portfolio.
  3. The investor can use the indices to allocate funds rationally among stocks. To earn returns on par with the market returns, he can choose the stocks that reflect the market movement.
  4. Index funds and futures are formulated with the help of the indices. Usually fund managers construct portfolios to emulate any one of the major stock market index. ICICI has floated ICICI index bonds. The return of the bond is linked with the Index movement.
  5. Technical analysts studying the historical performance of the indices predict the future movement of the stock market. The relationship between the individual stock and index predicts the individual share price movement.
  6. Stock market function as a status report on the general economy. Impacts of the various economic policies are reflected on the stock market.

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