Reviewed by Aug 27, 2020| Updated on
Market indices are a theoretical portfolio of investment holdings that portrays a sector of the stock market. The calculation of the value of the index is determined by the prices of the underlying assets. Values of some market indices are based on the weight of market capitalisation, revenue weighting, fundamental weighting, and float weighting. Weighting is a technique of regulating the specific effect of items in a market index.
Investors, to catch market fluctuations, follow various market indices. In India, the most popular indices are the Bombay Stock Exchange (BSE) Sensex and National Stock Exchange (NSE) Nifty.
The BSE Sensex contains 30 leading stocks traded on the Bombay Stock Exchange (BSE) from various sectors, while NSE Nifty consists of 50 top-performing stocks traded on the National Stock Exchange (NSE). The NSE Nifty and BSE Sensex are considered as the benchmark indices of India and are seen as the indicators of the Indian markets.
The Methodology of Market Indices
An index has its own methodology to calculate its value. The weighted average method is the fundamental base to make index calculations. This is because the values of an index are obtained from the calculation of the weighted average of the overall portfolio.
By its very nature, price-weighted indices are usually significantly affected by fluctuations in holdings with the highest price and market capitalisation. Weighted indices are being considerably affected by fluctuations in the largest stocks and other factors on the basis of the nature of weighting.
Products Based on Market Indices
Mutual funds, an investment vehicle which pools investments from various individual and institutional investors, have a class of funds that track a specific index. Index funds try to emulate the performance of a market index, and its portfolio consists of assets of the index that it is tracking. The prospectus of every index fund will have the details of the benchmark that it will try to emulate.