Ever had the feeling of the bears and the bulls fighting it out, and you know nothing about it? Before understanding the details about a stock index, thorough knowledge about stocks is a primary priority.
What are stocks?
The stock of an entrepreneurial body is its total monetary worth- simply put, it is the full money invested in the enterprise by the investors. It does not include any tangible assets.
The stock of a company is divided into shares, and a person who buys a percentage is known as a shareholder. A shareholder is a member of the company and is entitled to privileges such as the right to vote on topics such as the election of the board of directors, the right to share during the distribution of the company’s assets, etc. Now, every share that a shareholder buys is bought at a monetary cost.
For companies that are hugely fortunate and pretty consistent in delivering profits, the stock is much priced. And similarly, a company improper on benefits will have a low-value share. Shares are bought or sold in the share market (also known as the stock market or the stock exchange).
How does the index work?
A stock index is a measure indicative of the cost of a share, irrespective of the company (as long as it is registered under a particular stock market).
A stock index is nothing but the weighted mean of the price of the share of each company in the market, with the frequency of instance of a share being counted as the number of shareholders of that specific share.
Although the above procedure mentioned is the simplest of ways a stock index can be calculated, contrary indices use contrary methods. Most indices in the world use the weighting function as the market capitalization (a measure of the bigness of the company).
This implies the larger an enterprise is, the stronger its result will be on the index. Thus if the big fish is sick, the index will inevitably go down, no issue how robust the smaller stocks are. A stock index does not forever provide us the right picture.
The index measures the impact of a few stocks which are handpicked by a standing committee to represent the whole lot. However, the shares do not remain the same year after year and are changed at random over time. Thus looking at a stock index for the last ten years (say) does not necessarily display us the trading model of a set of stocks; instead, it is a quite mixed bag of random trading patterns.
The stock index can be of principally two types- the global stock index, and a national stock index. A comprehensive stock index represents enterprises that are not domiciled under a specific nation and do business globally.
And similarly, a federal stock exchange represents enterprises domiciled under the power of a particular country. Common examples of global and nationwide indices contain MSCI World, S&P Global 200, and S&P 500, Nikkei 225, etc. respectively. The numbers at the end of the names indicate the number of companies registered under that index.