Why Is There A Stock Market Index?


If you ask someone how the market was today they would say that it was good or it was bad. What do they mean when they say this?

Every stock in the market does not move in the same direction. So it could happen that one day 70% of the stocks moved up whereas 30% of the stocks in the market had a negative move. This led to the index value ending in positive and thus when one says that the market has performed in positive today it means he is talking about the index which is abroad representation of the market.

Understand the index

The index may have performed well and ended in positive but this does not mean your stock would have also ended in the green. So the index just denotes what the majority of stocks have done today. If the majority of stocks have moved up then the market is bullish. If the majority of stocks have performed badly then the market is bearish. The market is flat if the number of upward moving stocks and downward movings tocks is the same.

So the index basically defines a few companies and represents the view of the broad market. So when you are asked how the market has performed all that you do is to check the general stock trend to give the answer.

The market index

Every market has an index and this makes your effort easy where you do not have to track every stock individually to understand how the market has performed. The major companies or the blue-chip companies are packaged together to make the market index.

The index, learn more will let you know minute by minute about how the participants in the market feel that their future may hold. The indexing movement reflects the expectations of the market and when you see that the value of the index is going up this is because of the market participants feel that the future of the stock index is positive.

Indexes specific to a sector

There are also indexes created that are specific to a sector. The index would represent the broad market and the sectoral index can be used if you only intended trading in a particular sector. These include the bank index, IT index etc. The way that this index is made is also similar to the market index. The only difference is that the stocks that are selected to form the index are specific to a particular sector.


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