Indexing

Reviewed by Sweta | Updated on Aug 26, 2020

Introduction

Indexing, in general, refers to organizing data or information in the desired format. Financially, indexing is a method used to categorize specific market segments. Indexing is an indicator or measure with respect to data.

Understanding Indexing

Indexing is a statistical measure which enables tracking of financial data. Indexes help in tracking financial and economic data. Indexes also facilitate tracking of trends in prices, whether an uptrend or downtrend. For example, the statistics pertaining to the cost of living are obtained from the consumer price index. In the case of stock market indices, sector-specific indices enable exposure to a sector without the necessity to invest in individual stocks.

Indexing can also be a method for grouping specific market information or as a strategy for managing investments. Certain indexes created for specific sectors or segments help in tracking economic trends.

Factors to Consider

  1. Indexing offers an investment option to many investors who lack time and sufficient knowledge to make specific investments in the stock market.

  2. Index funds apply various filters for choosing the underlying stocks such as past financial performance, dividend payout ratios, growth opportunities, and so on.

  3. Index funds help in diversifying the risk associated with individual stock investments.

  4. Indexing is a passive investment strategy allowing investor exposure to specific market segments without analyzing the base data.

  5. Retirement benefits are calculated using the consumer price index and making adjustments using inflation based indexing measures.

  6. Market indices are used for tracking investment performance. Indexes are used at benchmarks for comparing the performance of stocks. Investors can invest in index funds. Index funds generally have a low expense ratio and work well in a passively managed portfolio.

  7. Index funds can also be constructed with a mix of equities and debt securities, such as stocks and bonds.

  8. Index funds can also be formed and managed as a fund of funds, including exchange-traded funds in their portfolio.