The stock market is home to thousands of equity stocks. If you’re planning to trade or invest in equity, it’s practically impossible to study how the price of each stock is moving, isn’t it? What you need instead is a broader indicator that can help you assess how the market as a whole may be moving. Here’s where stock market indices come in.
They help you assess the performance of the stock market based on the performance of some of the top individual stocks listed on the exchange. These statistical tools are created by grouping together a few stocks listed on stock market exchanges. The stocks selected may belong to the same sector, have the same kind of market capitalization, or even simply belong to the biggest companies listed on the exchange.
Stock market indices help you gauge how the market as a whole may be moving and measure the changes in the market or in one of its segments. There are different types of stock market indices such as benchmark indices, sectoral indices and thematic indices. Stock market indices can be calculated using different methods such as full market capitalization, free-float market capitalization, price-weighted calculation or equal weighted calculation.