Role of Index in stock market

Aug 9, 2022

Role of Index in stock market

What is a market Index 

A market index is a hypothetical portfolio of investment/asset holdings that represents a section of the financial market. The calculation of the index is derived from the individual prices of the underlying investments. Indexes have values depending on market-cap weighting, revenue-weighting, float-weighting and fundamental-weighting. Weighting is a method of calculating the impact of each item in that index.

Use of index 

Stock market indexes are very useful and act as an indicator for conservative investors in times of market volatility. If you’re just starting in the equity markets, it may be a good idea to start by learning about share market indices and testing the waters to get a better understanding of how the marketplace works in practice. You could also create a portfolio that copies a stock market index with IIFL. It will reduce the costs and effort of research and stock picking without compromising on the quality of your investments through expert recommendations and an investment plan created according to your risk appetite.

Index types

There are different types of indexes based on the kind of stocks taken into account to create the index. here’s a closer look at some of the types:

  • benchmark indices like BSE sensex and NSE Nifty
  • Broader indices such as nifty 50 and BSE 100
  • Indexes created based on market capitalisation of companies, such as BSE midcap and BSE Smallcap
  • Sector-specific indices like nifty FMCG, Nifty Bank Index, CNX IT, and S&P BSE Oil and Gas

Key take away

Stock market indices are extremely essential in Portfolio management in the practice for anyone looking to grow sustainable wealth. However, it still requires a lot of market knowledge and skills to get it right and an individual has to dedicate time himself or resources to appoint a portfolio manager for the same. 

To save you the trouble you can choose to invest in Peer to peer platforms like LenDenClub where you can still get consistent high returns* on investment allocation done by AI. A P2P model involves diversification of your fund into several small loans to mitigate risk. 

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*P2P investment is subject to risks. And investment decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.

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