The Stock Market Index is a barometer of market behaviour. The stock market index reflects day to day fluctuations in stock prices and market direction.The function of a stock index is to provide information to the investors regarding prices of stocks relating to different industries. The stock market is the barometer of economic health as market prices are affected by various economic factors.
A stock exchange does not indicate fluctuating prices of all the companies in the country. It only includes best stocks which represent a portion of the overall market. Generally, stocks of a company which performs best in its industry is selected. The parameter to select the best company from a particular industry can be the size of the company, market capitalization, performance growth or some other basis. For Example, in Bombay Stock Exchange there are two pharmaceutical companies, namely Cipla Ltd. and Dr Reddy’s Laboratories Ltd. As these two companies are best performers of that industry.
It is not necessarily fixed that once a company is included in a stock index then it can’t be removed. The composition of a stock exchange alters as per the performance of companies. Stock Exchange may remove a bad performing company and can add a well performing new company.
The two most popular stock index in India are
- BSE SENSEX – An index of Bombay Stock Exchange (BSE) which comprises of 30 stocks. SENSEX is the abbreviation for Sensitive Index
- NSE Nifty – An index of National Stock Exchange (NSE) which comprises of 50 stock.
Any change in the price of the stocks leads to a change in the index value. If the value of one or more stocks increases, then the index value will increase. If the value of one or more stock decreases, the value of stock decreases. It is like the cricket score. if all players play well, then the score increases. when one or more player score many runs and other players do not score runs, then also, the score increases