Stock market indices are the parameters of the stock market. With some 5000 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 is in inclining position or in declining. The Indus 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, CRISIL 500, Business line 250 and RBI indices of ordinary shares.
Needs of indices
1. In this help to recognise the broad trends in the market.
2. Index can be used as a benchmark for evaluating the investors portfolio.
3. Indices function as a status report on the general economy. Impacts of the various economic policies are reflected on the stock market.
4. The investor can use the indices to allocate funds rationally among stocks. To on returns on par with the market returns, you can choose the stocks that reflect the market movement efficiently.
Computation of stock index
Stock market index may either be a price index or wealth index. The untreated price index is a simple arithmetic average of share prices with the base date. This index gives an idea about the general price movement of the constituents that reflects the entire market. In a wealth index the prices are weighted by market capitalisation. In such an index, the base period values are adjusted for subsequent rights and bonus offers. This gives an idea about the real wealth created for shareholders over a period of time. The given example gives the calculation procedure for the wealth index:
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