The stock market index acts like a barometer which shows the overall conditions of the market. They facilitate the investors in identifying the general pattern of the market. Investors take the stock market as a reference to decide about which stocks to go for investing.
In a share market, you would thousands of companies listed on the exchange. Broadly, picking the appropriate stock for investment may seem like a nightmare. Without a benchmark, you may not be able to differentiate between the stocks.
Simultaneously sorting the stocks becomes a challenge. In this situation, a stock market acts like an instant differentiator. It classifies the companies and their shares based on key characteristics like the size of company, sector, industry type and so on.
Investing in equities involves risk and you need to take an informed decision. Studying about stocks individually may seem very impractical. Indices help to fill the knowledge gaps that exist among the investors. They represent the trend of the whole market or a certain sector of the market. They are believed to indicate the performance of the entire stock market.
In the same manner, an index which is made up of pharma stocks is assumed to portray the average price of stocks of companies operating in the pharmaceutical industry. By comparing with the underlying index, you can easily judge the performance of a stock. You would definitely want to invest in a multibagger so as to justify the risk assumed. Else you can be better off investing in low-cost professionally managed index funds.
You may also compare the index with a set of stocks like the Information technology sector. As an investor, you can know market trends easily. When you are participating in equity markets, amongst other things, knowing investor sentiment becomes an important aspect.
It is because the sentiment affects the demand for a stock which in turn impacts the overall price. At this juncture, indices help to gauge the mood of investors. You may even recognize investor sentiment for a particular sector and across market capitalizations.
Passive investment refers to investing in a portfolio of securities which replicates the stocks of an index. Investors who want to cut down on the cost of research and stock selection prefer to invest in index portfolio. Consequently, the returns of the portfolio will resemble that of the index.
An index is made up of similar stocks based on market capitalization, industry or company size. Upon selection of stocks, the index value is computed. Each stock will have a different price and price change in one stock would not be proportionately equal to the price change in another. Every day, hundreds of thousands of brokers and investors trade on these stock exchanges. For Quick Alerts. Subscribe Now. For Daily Alerts.
For investment related articles, business news and mutual fund advise. Allow Notifications. You have already subscribed. Now, where does this issuance of shares occur? On a platform, we call the stock exchange. A stock exchange is an organized market, where traders can buy and sell the shares of different companies. It is the fourth largest in the world based on equity trading volume. Based in Mumbai and established in , it was the first stock exchange in India to offer a screen-based system for trading.
The NSE was initially set up with an aim to usher in transparency to the Indian market system, and it has ended up delivering on its aim quite well. With the help of the government, the NSE successfully offers services such as trading, clearing as well as the settlement in debt and equities comprising domestic and international investors.
With a trading speed of 6 microseconds, the BSE is the fastest stock exchange in the world. The BSE does have some interesting history. In those times, it used to function in Dalal Street under a banyan tree - where traders would gather together to buy and sell stocks.
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