Share market indices importance and key terms

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    19. Types of traders in share market
    20. Market Index How Indexing Works, Types, and Examples in share market
    21. Share market indices importance and key terms
    22. Index construction methodology
    23. Share market terminology
    24. Share market terminology for beginners
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Marketopedia / Stock Markets Basic / Share market indices importance and key terms

The Index can be employed in a number of practical ways. It provides an invaluable resource, making it possible to quickly track down a piece of information and refer to it. 

  1. Information: 

The index reflects the wider sentiment in the market and gives us a picture of the state of the economy. An increase in the share market index suggests optimism from people about what’s to come, whereas a decrease indicates pessimism.

The Nifty 50’s value on 21st November 2022 was 18150, which demonstrates a growth of 14.75% since six months ago when it was at 15820. This bullish market sentiment highlights the optimism of market participants in regard to India’s economic future.

The Index at 9:30 AM on 21st November was measured at 18140, but one hour later, it shifted to 18099 – a drop of nearly 40. This amount of movement suggests that market participants are not particularly confident in the short-term outlook.

  1. Benchmarking: 

Benchmarking is a must for any trading or investment activity. Let’s assume last year, your corpus rose from Rs.100,000 to Rs.120,000, resulting in a 20% return. On the surface, it appears to be a great performance; however, if the Nifty had gone up by 30%, it would be an even better result for you.

It may seem as though you haven’t done as well as you’d hoped in the market. Usually, investors aim to exceed the performance of an Index. Without it, it’s hard to measure how successful you’ve been. Comparisons to the index can be highly beneficial for assessing your success.

  1. Trading

Trading on the index is a popular way to participate in the market for many traders. This allows them to make a broader assessment of the economy or overall state of affairs and turn it into an investment decision. Often, these traders will have a short-term outlook when trading the index.

Imagine this scenario:

At 10:30AM the Finance Minister is about to give their budget speech. Nifty index stood at 18,150 points an hour before the announcement, and it’s anticipated that the budget will be good news for the economy. You may want to purchase the index at its current rate to show faith in your outlook. After all, this index is reflective of the nation’s wider economy.

The budget is as expected, with the index reaching 18,450 – a 300 points profit! This was possible through the ‘Derivative’ segment of the markets. Although exploring derivatives is a bit early at this point, do remember that you can trade indices through it.

  1. Portfolio Hedging 

Investors typically construct portfolios of stocks consisting of 15-20, intended for long-term holding. In light of a protracted downturn, such as occurred in 2008, the portfolio could suffer losses due to the declining market and thus require hedging. We shall examine how this can be accomplished with index futures trading in an upcoming module on Futures Trading.