Instead of just focusing on the performance of a singular firm, indices help you gauge the overall health and strength of a market. Indices or indexes are performance benchmarks in the financial markets. They are indispensable financial tools whether it is about tracking market performance, investing in index-linked investment products, or evaluating investment portfolios.
A stock index can reflect the state of the stock market or a sector in the stock market. Indices meaning in the stock market is that the price performance of a group or basket of listed securities is tracked through a single numeric value. An index can be defined as a statistical representation of a set of securities listed in the stock market.
Financial markets across the world have many indices to track a group of securities based on various characteristics such as market cap, industry, sector, etc. For example, the NIFTY (National Stock Exchange Fifty) is an index of the 50 largest companies in India listed on the NSE (National Stock Exchange). SENSEX (Stock Exchange Sensitive Index) is an index of the 30 largest companies in India listed on the Bombay Stock Exchange (BSE). Other indices are BSE MidCap, Nifty Midcap 100, S&P BSE ALLCAP, etc.
This detailed article can help investors to understand the market index meaning and the way to index trading.
What is index trading?
It’s the buying and selling of a specific stock market index. Investors speculate on the price of an index rising or falling. When the share price for the companies within an index goes up, the index value increases. If the price falls instead, the value of the index will drop.
Traders can gain exposure to financial markets without investing in individual stocks through index trading.
Few stock market indexes, like SENSEX and NIFTY, track some of the biggest companies in the Indian stock market. One can invest in these indices through futures and options contract.
What are the most traded indices?
Important indices to trade in India include the following:
- BSE Sensex and NSE Nifty (Benchmark)
- BSE Bankex and CNX IT (Sectoral)
- BSE Smallcap and BSE Midcap (Market cap)
- BSE 100 and BSE 500 (Broad-market)
How to identify what moves an index’s price
- The price of an index is dependent on various aspects, including central bank policies, companies’ financial results, other announcements, economic events, changes to an index’s composition, investor sentiment, commodity prices, etc. Such news or conditions increase the volatility that causes an index’s price to move.
- Increase if the companies listed in the index are growing well and the economy is also in a good state.
Why trade indices?
- Diversification: Generally, newbies in the stock market start with index-trading as Indices tend to be diversified.
- Risk Reduction: Investors can trade a basket of shares or index-tracking funds instead of investing in stocks directly to reduce risk.
- Know General Price Movement: Indices constantly measure the securities’ prices and provide an average price point, making it easy for investors to check the general price movement of securities.
How to trade indices
- Derivatives: An index is an underlying asset in the case of derivative contracts, like futures and options. All index derivatives are cash-settled on or before the expiry. Since index trading is not like trading a stock, traders cannot take its delivery. A trading account with a stockbroker is enough to trade derivatives online.
- Mutual Funds: Individuals can invest in mutual funds like index funds. Fund managers follow the same portfolio of stocks as in an index like the SENSEX. They keep tracking the index and try to outperform the index performance. Exchange-traded funds (ETFs) are also popular to start with index trading.