2.13What is a market index?
1What is it?
A market index is a single number that shows how a group of stocks is doing overall.
2Why does it exist?
There are thousands of stocks. If you want to know "Did the market go up today?", you cannot check them all. An index summarises a chosen group into one number.
3Real-life example
Like a class’s average marks: instead of checking 50 students one by one, the average tells you how the class did overall.
4Stock market example
Most Indian indices are free-float market-cap weighted: bigger companies (by the value of shares available to the public) move the index more. If HDFC Bank and Reliance rise, the Nifty usually rises even if many small members fall.
5Calculation
Index change % ≈ Σ (weight of stock × change % of stock)
- Imagine an index with 3 stocks: A (weight 50%), B (30%), C (20%).
- Today A +2%, B −1%, C +1%.
- 0.5×2 + 0.3×(−1) + 0.2×1 = 1 − 0.3 + 0.2 = 0.9
Index rises about 0.9%. (Simplified hypothetical.)
6Quick revision
- An index summarises a group of stocks.
- Bigger companies have more weight.
- Used to measure "the market" and as a benchmark.
7Knowledge check
Q1. Why do we need an index?Show answer
To understand the overall direction of many stocks in one number.
Q2. In a market-cap weighted index, who moves the index more?Show answer
The largest companies.
Q3. Can an index rise while most of its stocks fall?Show answer
Yes, if a few heavyweight stocks rise strongly.
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