A Primer on Stock Indices

The words Sensex and Nifty are the most commonly heard stock market terms.

A stock index is a statistical measure that exhibits the changes in the trends of the stock market in general. Indices are used to represent the performance of the broader security market, or a particular segment of it. An index is created by clubbing together stocks based on a pre-defined criterion which depends on the characteristics of a specific index. The value of the index is calculated using the values of the underlying stocks that make up the index. Consequently, any changes in the prices of these stocks will impact the overall value of the index. Therefore, let’s say that if a majority of the stocks in the index were to witness an increase in their prices, the value of the index will go up as a whole and vice-versa.