Market index

Market Index

Securities market index are construct to get the answer of following questions; “What is the market doing?”, “What did the market do yesterday?” Index number is devoid of dollar values or other units of measure. Stock market index are “pure number” use for marketing composition between different index numbers in the same series of other index number. Market index are also know as the indicator of the movement of the overall securities prices in the secondary market.
E.g.
Nepal Stock Exchange (NEPSE)
Dow Jones Industrial Average (DJIA)
Standard & Poor 500 Index

Market index furnish a handy summary of historical price levels in their specific markets, especially when they are presented in graphical form. By the use of index, investors who own several securities in a give market or industry can quickly get an indication of how mkt movements have affected the value of their portfolio. Similarly, indexes are useful for historical analysis. By analyzing mkt indexes and other economic indicators, an analyst may detect some consistent relationship between different indexes and the fortunes of sectors of the economy.

Methods of Calculating Index:

There are four most popular methods to compute market index. They are:

1) Price Weighting:

The Dow Jones Industrial Average is calculated by using this method. In this method index is calculated by summing the prices of the stocks that are included in the index and ends by dividing this sum by a constant (called Divisor). Mathematically, the formula is: