What is the meaning of Share INDEX Increasing or Decreasing by 1% ?
The share market index measures the relative values of the group of stocks of which it is composed of. When the value of stocks in this group changes when they are traded, the value of the index too changed. If an index goes up by 1%, the total value of the securities which constitute the index too goes up by 1%. When the index increases from 17000 to 17170, neither 17000 nor 17170 mean anything in isolation. They need to be compared with each other.
The most popular method of constructing a market index is the value weighted method in which the initial market value of the stocks is assigned as a base index value. For example, lets take base year 2000 (imaginary) and take 30 stocks, which have a market capitalization of Rs. 1000 crore. We assume that the base value was Rs. 100 on the first day. If the market capitalization of the 30 shares for which base value is 100 on the first day increases to Rs. 11,00 Crore on the next day, the new index would be
(1100/1000)*100=110
So, 110 will be the index rate on the next day. Neither 110, nor 100 have a meaning until and unless they are compared with each other.
In other words an index provides an historical comparison of returns on money invested. It provides the comparison of the returns in the stock market against other forms of investments such as gold or debt. Indices are used by financial services firms to benchmark the performance of their portfolios and to serve as a yardstick for measuring the performance of fund managers and their respective funds.
