A stock market index is constituted by a set of stocks in an equity market. It could be exchange specific or country or region specific or sector specific. It gives a relative picture of performance of a country/region. It’s not an absolute measure but serves as a most important thing for benchmarking and comparing. Mutual funds performance is measured against a predefined index. A stock market index number is a relative measure of the prices of a pre-defined group of stocks. It is a relative value because it is expressed relative to the weighted average of prices at some chosen starting date or base period. So all the constituents don’t necessarily go down when the value of an index goes down. But its movement shows the trend of the market i.e. bullish or bearish.
The method of selecting constituents and calculating index value vary from provider to provider.Apart from the exchanges there are some companies like MSCI Barra (Morgan Stanley is the controlling stake holder), S&P, Citi Group, Barclays etc into ‘index provider’ business.
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Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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