As a beginner, of course you will question what a stock price index is that is commonly talked about by other investors. Stock price indices are very important in conducting stock market analysis. Indices will function as indicators on a market trend, which we will learn in this discussion. The stock price index is a statistical measure of all price movements in a group of existing stocks, according to certain criteria and methodologies and will later be evaluated periodically. For more details about this stock price index, you can learn about it through the article below.

What is a Stock Price Index

Market indices track the performance of a specific group of stocks, bonds, or other investments. These investments are often grouped around a specific industry, such as technology stocks, or even the stock market as a whole, as is the case with the S&P 500, the Dow Jones Industrial Average (DJIA) or the Nasdaq. There is no set size when it comes to market indices. The DJIA contains only 30 stocks while the CRSP index has more than 3,700. What is important is that each contains a sample size large enough to represent the overall behavior of the economic sliver they want to represent. Stock market indices, also known as stock indices, measure the part of the stock market. In other words, indices measure the change in the stock prices of different companies. Stock indices are determined by calculating the prices of certain stocks (generally weighted averages). It is a tool widely used by financial institutions and investors to compare the returns of a particular investment and to describe the market.

Function of Stock Price Index

Stock market indices can be useful to follow for several key reasons:

  1. Tracking the most followed stock market indices can give you an overview of the overall health of the stock market.
  2. Tracking lesser-known indices can help you see how a particular market segment is performing compared to the market as a whole.
  3. If you don't want to invest in individual stocks but just want to match the overall market performance, then a cost-effective way to earn solid returns over time is to invest in an index fund that tracks your stock market index. most interested.

Stock market indices make it easy to know how the market is performing without having to follow the ups and downs of each individual stock. They also open up simple investment opportunities that even novice investors can use to participate in the long-term success of the stock market.

Types of Stock Price Indices

There are three types of stock market indices mentioned below: 1) Benchmark Indices 2) Sectoral Indices 3) Market Capitalization-Based Indices
  1. Benchmark Index The Nifty 50 – a collection of the 50 best-performing stocks and the BSE Sensex – a collection of the 30 best-performing stocks are indicators from the National Stock Exchange and the Bombay Stock Exchange, respectively. Each of these stock pools is known as a benchmark index because they use best practices to organize the companies they choose. Therefore they are known as the best reference point for the market in general.
  2. Sectoral Index Both the BSE and the NSE have some good indicators that measure companies that fall under one particular sector. Indices such as S&P, BSE Healthcare and NSE Pharma are considered good indicators of changes in the pharmaceutical sector, respectively. Other prominent examples are the S&P BSE PSU, and the Bank Nifty PSU Index is an indicator of all listed public sector banks. However, both exchanges do not have to have corresponding indices for all sectors, but this is generally a significant cause.
  3. Market Capitalization-Based Index Some indices select companies based on their market capitalization. Market capitalization means the market value of any public company on the stock exchange. Indices such as the S&P BSE and the NSE small cap 50 are groups of companies that have a lower market capitalization according to the rules set by the Security Exchange Board of India (SEBI).
  4. Other Index Some other indices such as the S&P BSE 500, NSE 100, S&P BSE 100, among others, are slightly larger indices and come with a larger number of stocks listed. You may have a low-risk appetite and stocks listed on Sensex may have a high-risk appetite. An investment portfolio is not tailored to meet every need. So investors should focus and invest where they feel safe.

Advantages of Knowing Stock Price Indices

Over the years, some investors, whether beginners or experienced, have made significant profits by planning and investing in stocks. However, there are investors whose success formula does not work at all so that it makes everyone think twice before entering the stock market and investing in stocks. When an investor makes the right and right decision, there is a higher chance of profiting from the investment. After all, the stock market is completely unpredictable. However, investing in stocks has several key benefits over other investments.
  1. Smooth and Sustainable Transactions An investor who buys shares of a particular company basically means getting a share ownership in a particular company. Thus, investors will feel a sense of ownership after buying the stock. Owning ownership means that they will become shareholders and play an important role in the company's decision-making. Investors will also have the power to vote in the decisions taken by the company. They also receive annual learning reports to gain detailed insights and learn more about the company. Owning shares of a particular company will be a way to express their loyalty to the company and the overall success of the business.
  2. Diversification Investors who put their hard-earned money into different types of investments, stock market investments provide great profits by providing diversification. Investments in the stock market change their value independently of other investments such as bonds and real estate. Holding stocks for a longer period of time will help investors to estimate losses on other investment products. Adding stocks in their portfolio creates greater risk and provides big, quick returns that help investors avoid overly conservative investment strategies.
  3. Dividend Benefits Dividends refer to the rewards that a company gives to its investors. In simple words, it is the company's additional income for investors that is paid annually by each company. No matter whether the stock has lost its value or represents a profit derived from the stock, dividend payments will arrive. Dividend income can help investors to fund retirement or pay for other investments to grow their portfolios over time.
  4. Investment Benefits One of the main benefits of investing in the stock market is that investors get the opportunity to earn more money. Over time, if the stock market rises in value, the price of a particular stock can go up or down. However, investors who have put their money in stable companies will see profit growth. Likewise, investing in several different stocks will help investors build their wealth by capitalizing on growth in various profit-generating sectors.
  5. Liquidity Stock is generally known as a liquid asset because it can be easily converted into cash consisting of several buyers at a given point in time. However, when compared to other assets, it is more difficult to find buyers for some assets such as properties. However, when it comes to stocks, it is much easier because the average daily volume of transactions on NSE and BSE is high. This means that there are several buyers and sellers who pay attention to one stock.
  6. Higher Returns in the Short Term The biggest and main advantage of investing in stocks is that it has the potential to generate high returns in a short period of time compared to other investment avenues such as FD Bank.
  7. They are well protected by SEBI The Indian stock market is regulated by the Stock Exchange Board of India (SEBI). The Security Board of the Exchange of India (SEBI) is largely responsible for regulating the stock exchange, its development and especially protecting the rights of all investors. When an investor puts their money in various financial products in the stock market, their interests are also protected by the regulatory framework set by SEBI. This helps them in reducing the risk of some fraudulent activities by the company.
  8. Flexibility To Invest Smaller Amounts An investor who wants to enter the stock market can start their small investment in the stock market by buying shares of small or mid-cap companies but in smaller units. Another major advantage of investing directly in stocks is that investors can buy as per their own choice, and are not obliged to invest a certain amount each month.
  9. It allows you to take advantage of economic growth Corporate revenues usually tend to increase along with economic growth. This is usually due to several factors such as increased job creation, which leads to increased revenue and sales. Thus, investors who put their money in stocks of businesses affected by economic growth help them grow better.
  10. Easy Buying and Selling Process The process of buying and selling in the stock market is simple and easy for all investors. The purchase of shares is carried out with the help of a broker, financial planner or online mode. It takes almost a few minutes to create an account and start trading. An investor can also buy and sell stocks easily without going anywhere, and the profits are instantly credited to their bank account.
This a little discussion from GIC Indonesia which has explained about "Stock Price Index, from Function to Profit". Also find out about other trivia about securities, fraud in investment and trading, as well as other financial matters, such as "Government Bonds: Types to How to Buy" which can be read in the GIC Journal. Also register at GIC to be able to trade starting from IDR 150,000 and get other bonuses.