Stock Market Index Share Marketing: Introduction (Meaning)
A stock market index is also termed as ‘Index’. It is a figure that calculates the relative value of a group of stocks. As the value of the stocks changes, the value of the index also changes. If the value of an index goes up by 1% then it is meant that the total value of the securities which is used for calculating the index also rises up by 1% in value.
A stock market index is a numerical measure which shows the switches which are happening in the stock market. For creating an index, a couple of identical stocks are chosen from various securities that are previously listed on the exchange and assembled together.
The selection of stocks could be based on the type of industry, market capitalization or the size of the company. The value of the stock market index is figured out using the values of the underlying stocks. Any adjustments taking place in the underlying stock prices will definitely impact the entire value of the index. When there is a rise in the prices in most of the underlying securities, then the index will rise accordingly and vice-versa. Thus, a stock index reflects the entire market position and controls the prices of the financial product, commodities or any other markets.
The stock market index operates like an indicator which exhibits the entire circumstances of the market. They help the investors to identify the regular structure of the market. Investors take the stock market as a resource to analyse about various stocks before investing. Stock Market Index Share Marketing.
Example of Stock Market Index:
The XYZ Index consists of four companies. If we see the previous trading day then at the end of the day, the index was set at 4,386 points. The next day two of the companies of this index have gone up in its value, price of third company shares index dropped and there is no change in the fourth company. It remained same. The overall value of these stocks raised up by 2%, hence the XYZ index increased its indices by 2% or 4,473 points.
History of the Stock Market:
The first major stock exchange ‘New York Stock & Exchange Board’ was formed in 1792 on the wall street, New York City, the United States of America and its entity is called ‘Philadelphia Stock Exchange’ was formed two years later. This exchange was renamed as “New York Stock Exchange” in 1863.
How old is the Stock Market?
NASDAQ – National Association of Securities Dealers Automated Quotations exchange was formed in 1971 and it is considered as the world’s first electronic stock market. Till date, NASDAQ is the second largest exchange in the world.
Importance of Stock Market Index:
If an investor wants to invest in any shares or mutual funds, then it’s very essential to calculate/measure the current performance of the investments across the market index. If the margin continuously falls off behind the index then it might take some time to cope up for the new investments.
Investing in stock market is one of the major sources through which various organizations and business people increase their funds. Share markets allow the companies to trade openly, in order to develop their business. It is easy for the investors who easily buy/sell their securities because of the liquid nature of stock market. This particularly grabs the interest of the investors.
In the stock market, various companies will be listed on the exchange and picking up the suitable stock for investment might lead to a bad experience. Without using the standard reference, it will be very difficult to distinguish between the stocks. During this scenario, the stock market index acts as an immediate differentiator.
Stock Market Index in India:
National Stock Exchange of India Ltd (NSE Nifty) and Bombay Stock Exchange (BSE Sensex) are the standardized/benchmark indices in India. These are considered to signify the performance of the whole stock market. In the similar way, an index which is created as pharma stocks are pretended to represent the average cost of stocks of other companies functioning in the same industry.
Few of the other indices in India are as follows:
(i) Nifty 50 and BSE 100
(ii) Indices which are based on the market capitalization like the BSE Small cap and BSE Midcap
(iii) Sectoral indices like Nifty FMCG Index and CNX IT
The NIFTY 50 index is National Stock Exchange of India (NSE’s) benchmark of widely based stock market index for the Indian equity market. Full form of NIFTY is ‘National Stock Exchange – Fifty’. It symbolises the average of 50 Indian company stocks in 12 sectors. One of the two main stock indices is used in India and other is BSE Sensex.
Nifty is possessed and managed by ‘India Index Services and Products (IISL) which is a completely owned subsidiary of the NSE-Strategic Investment Corporation Limited. The Nifty 50 was started on 1st April 1996 and is one of the countless stock indices of Nifty.
BSE introduced the new index called ‘BSE MID-Cap’ index and ‘BSE Small-Cap’ index to record the efficiency of companies with comparably smaller market capitalization.
BSE-500 Index indicates more than 93% of the listed universe. Corporations which have huge market capitalization is against the evolution of BSE-500 index. This kind of creation of a different indicator is required to catch the current flow in companies with lower market capitalization. Since many years, BSE Small-Cap and BSE Mid-Cap indices have been confirmed to be a great advantage for the community of investors who have been investing continuously.
Bombay Stock Exchange (BSE) has brought in the new index series termed as ‘BSE Small-Cap’ index and ‘BSE Mid-Cap‘ index to record the achievement of the companies with comparably tinier market capitalization.
BSE-500 Index – represents greater than 93% of the listed creations. Over the years, BSE Small-Cap and BSE Mid-Cap indices have accepted to be a great benefit for the investor.
The NIFTY FMCG Index is constructed to indicate the action of Indian FMCG’s Companies. FMCG means Fasting Moving Consumer Goods. It involves companies manages non-durable products and goods.
Stock Market Index Calculation:
A stock index or stock market index is a calculation of the value of the stock market. It is calculated from the prices of selected stocks (typically a weighted average). It is an instrument used by investors and financial managers to explain the market and to analyse the returns on certain investments.
The calculation of the index is done with a ‘Weighted Average Market Capitalization’. The Market Capitalization is based upon adding on the stock price and the outstanding shares. Each stocks weight is computed by dividing the market capitalization of each stock by the total market capitalization of S&P 500.
Ex. Sensex can be calculated through the following steps:
1. The market capitalization of every of the 30 companies consisting of the index is first driven by increasing the price of the stocks along with the number of shares circulated by that company.
2. The market capitalization is then increased to the free-float factor to acquire the free-float market capitalization.
3. The free-float market capitalization of the Index elements are divided by a number known as the Index Divisor. This index divisor is the only link to the original foundation value of the index.
For example, the Market Capitalization is based on the performance of the 30 key stocks is 80,60,000 and the base index of 1978-79 is 60,000. The index divisor becomes 100/60000 and the Sensex index value equals to 80,60,000 x 100/60,000 = 13433 for that day.
There are two main methods for calculating the stock market index. A price-weighted index indicates the value of the index to the stocks based on the share prices. The Dow Jones Industrial Average is a price-weighted index. Market-capitalization-weighted indexes offers value to stocks based on the entire value of the outstanding stock. The S&P 500 is a market-based index.
Simple Price Weight Calculation:
A simple price-weighted index is the index where the total of the ongoing cost of the stocks involved in the index. Charles Dow is the first person who calculated the Dow Jones Industrial Average by calculating the prices of 12 familiar or famous stocks. As the prices of the stocks keep fluctuating, the simple price-weighted index is calculated again by combining or adding the current stock process together.
Market–capitalization–weighted index calculation completely includes the calculation of the market cap of every stock in the index. Market capitalization is the stock price where the number of outstanding stocks produces the market value of the company. A market-cap index will combine or add up the market capitalization value of every stock in the index whenever it is recalculated.
For over a period of time, the value of few of the stocks in the market index will have price changes which are not caused by market forces. A stock split separates the stock price in half but does not change the value of the company. Market indexes regularly remove few companies and redeem them with some other stocks that better suitable for the objectives of that particular index. A company in the index might be brought together or go for bankrupt and have to be replaced. “Stock Market Index Share Marketing”