“Patience is the key element of success.”
-Bill Gates
What are the stock indices?
A stock index is a statistical measure that shows the changes happening in the stock market. The criteria for the selection of stock could be the type of industry, size of the industry, and market capitalization. The value of the stock market index is to be calculated using the values of the underlying stocks in the market. If any changes happen in the underlying stock prices it will impact the overall performance of the index. If the price of the underlying security falls the index will also fall and that could be also vice versa. In this way, a stock reflects the overall market view and direction of price movements of the financial products and commodities in the market.
What is the difference between Stock Index and Stock Market?
Stock Index
An index is a basket of stocks that are bought and sold as a group. BSE and NSE have several indexes, which consist of a combination of various stocks. If an individual buys shares according to the S&P BSE 100 index, he will own a small portion of each of 100 companies that are in the index.
Stock Market
A stock market is a place where equity shares of the company are traded. Bonds and other types of equities are also traded and exchanged in the stock market. The stock market is divided into two sections primary market and secondary market. The primary market is where companies sell new issues through an initial public offering (IPO). The secondary market is where the companies get listed on the exchanges after IPOs.
Why do we need stock market indices?
Stock indexes act like a barometer which shows the market conditions. It also makes investors aware of the general pattern of identifying market conditions. The fact is investors invest in the stock market with the reference of stock indexes.
- Comparison:- A stock market index helps an investor to compare the performance of different stocks. An index can be used as a benchmark to compare. For example, in India Sensex is used as a benchmark. So, to find out that the stock has outperformed the market, you just have to compare the prices of the index and the stock.
- Representation:- We all have an idea that indices act as a representative of the entire market or a certain segment of the market. In India, the BSE Sensex and NSC Nifty are considered as the benchmark. They represent the overall market performance.
- Sorting:- In the share market, there are thousands of companies listed. How do you differentiate between all of those and pick one or two to buy? How will you sort them? This is where indices come into the picture. Companies and their shares are classified into indices based on the key characters like the size of the company, sector of the industry, and so on that will help you in classification.
- Reflection:- You can simply compare an index with a benchmark to see if it has underperformed or outperformed.
How stock market indices are developed?
An index is made up of similar stocks based on the market capitalization of the company or industry. Each of the stocks will have different prices, and the price change in one stock would not be proportionate equally to the price change in another. It can be concluded that the value of the index cannot be arrived at as a simple sum of the prices of all the stocks. Each stock in the index is assigned a particular weight based on the market capitalization or the price. The weight will make the impact of the change in the price of stock and change in the value of an index.
What is market capitalization?
Market capitalization is an important concept to the investor who is looking for investing in company shares. Any investor would be looking at the market capitalization of the company before deciding to invest in the company. Market capitalization is also known as the market cap in short. In simple terms, the meaning of market capitalization is the value of the company in the market. Market cap calculation is based on the market value of outstanding shares of the company in the market.
What are the types of stock indices?
1. Price weight
In this method, the index value has been calculated based on the company’s stock price, and not market capitalization. Stocks with higher prices have greater weightings in the index than stocks at lower prices.
2. Market weight
Market weight is the total market value of a company’s stock. This is calculated by multiplying the share price of the stock with the total number of stocks floated by the company. It takes into consideration both the size and price of the stock. In an index using market capitalization, stocks are given a weight based on their market capitalization in comparison with the total market capitalization of the index.
What is BSE?
The Bombay Stock Exchange (BSE) is Asia’s oldest stock exchange based in Mumbai, India. BSE was established in 1875 as the native share & stock brother association. Before that brokers and traders would gather under banyan trees to conduct transactions.
Bombay Stock Exchange has recognized an exchange under the securities contracts regulation Act in 1957. Its benchmark index is (Sensex) and was launched in 1986. In 1995, the BSE launched its fully automated trading platform.
What is NSE?
The National Stock Exchange of India Limited (NSE) is India’s largest financial market. Incorporated in 1992, the NSE has developed into a sophisticated, electronic market, which ranks fourth in the world by equity trading volume in 2015. Today the exchange conducts transactions in the wholesale debt, equity, and derivative markets. One of the most popular offerings is the NIFTY 50 Index, which trades the largest assets in the Indian equity.
Why is it complex to invest directly in equities/ stock market?
- If you are investing directly in equities there is a lot of complexity that you need to take care, because you have to examine to check if the stock and asset valuation is attractive.
- Investing in stocks tends to be a dynamic process because the business prospects change every day with the competition. And concerning this, one must also understand how does the stock exchanges like Sensex and Nifty functions.
Now let’s look at the differences between investing in mutual funds versus direct investing in equity.
| Key Features | Mutual Funds | Equity |
| Ownership | No stake owned by the investor. | Investors get a share of ownership in the company. |
| Returns | The returns are subject to market risk. | No guarantee of returns. Returns are generated in case the company profits. |
| Costs | The investor will have to incur costs on fees to pay Fund Managers and other charges. | No such fees or costs involved |
| Risk | Susceptible to changes in the market, fairly risky | High risk is involved as the market is dynamic. |
| Professional Manager | A mutual fund is managed by a professional fund manager. | Complete control is with the investor. |
How to invest in an equity fund?
Investing in equity can be a tricky task. Because while you are investing in equity there are many factors that one should consider such as industry, size, and structure of the company and the management track. In case you don’t possess the knowledge of the stock market, instead of directly investing in equities, you can invest in Equity mutual funds. Fisdom offers you handpicked equity mutual funds in a hassle-free and paperless manner.
What is the simple process you need to follow?
- Download the Fisdom application, India’s most trusted app for Direct Plan Mutual Funds
- Sign in to Fisdom app.
- Complete your KYC process in just 2 minutes.
- Start investing in Equity Mutual Funds.
Being a smart investor one should choose the best investment option. One should always opt for investment which matches their financial goals and risk appetite. Equity mutual fund gives more returns than gold, real estate, and FDs.
