The Nifty 50 index saw a positive start on Monday, May 27, with a slight increase of 0.21%, reaching 23,005 points after opening. This marks a turnaround from the previous session, where the index dropped by 1.64%, indicating the market’s recent struggle to establish a consistent trend.
Over the past week, the Nifty 50 has risen by 2.24%, maintaining an impressive annual gain of 25.61%. Additionally, it stands 8.32% above its lowest valuation of the year, which was 21,238.80 points.
A stock market index is a crucial indicator reflecting changes in the value of a specific group of assets. It aggregates data from various companies or sectors within a market segment.
These indices are primarily utilized by stock exchanges globally. Each index may consist of companies with similar market capitalizations or belonging to the same industry. Some indices only consider a handful of stocks to determine their value, while others include hundreds.
Stock indices serve as barometers for investor confidence, business sentiment, national and global economic health, and the performance of investments in company shares. Typically, if investors lack confidence, stock prices tend to fall.
Moreover, these indices measure asset managers’ performance, allowing investors to compare returns and risks, assess financial asset opportunities, and build investment portfolios.
The use of these indicators began in the late 19th century when journalist Charles H. Dow observed that company stock prices tended to move together. He created two indices: one for the 20 leading railroad companies (the dominant industry at the time) and another for 12 other types of businesses.
Today, various indices exist, categorized by geographical location, industry sectors, company sizes, or even asset types. For instance, the US Nasdaq index comprises the 100 largest companies primarily in technology, including Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Alphabet (GOOG), Tesla (TSLA), Nvidia (NVDA), PayPal (PYPL), Comcast (CMCSA), and Adobe (ADBE).
Understanding Stock Indices
Each stock index has its calculation method, with market capitalization being the key component. Market capitalization is calculated by multiplying a company’s current stock price by the total number of shares held by investors.
Companies listed on stock exchanges must regularly report their composition, usually every three or six months.
Reading a stock index also involves considering its changes over time. Most current indices start with a fixed value based on stock prices at their inception, though not all follow this method, potentially leading to inaccuracies.
For example, if one index gains 500 points in a day while another gains 20, it might seem that the former performed better. However, if the first index started at 30,000 points and the second at 300, the percentage gain of the latter would be significantly higher.
Major Stock Indices
Among the leading US stock indices are the Dow Jones Industrial Average (Dow Jones), comprising 30 companies, the S&P 500, which includes 500 of the largest New York Stock Exchange companies, and the Nasdaq 100, featuring 100 major non-financial firms.
In Europe, prominent indices include the Eurostoxx 50, covering the 50 most significant eurozone companies, the DAX 30, Germany’s primary index featuring top Frankfurt Stock Exchange companies, the FTSE 100 from the London Stock Exchange, the CAC 40 from the Paris Stock Exchange, and Spain’s IBEX 35.
In Asia, the key indices are the Nikkei 225, composed of the top 225 companies on the Tokyo Stock Exchange, the SSE Composite Index, representing major Shanghai Stock Exchange companies, the Hang Seng Index in Hong Kong, and South Korea’s KOSPI.