What are Market Indices? | Stock Market Basics | Free Quantra Course

Welcome to this video on market indices. After completing this video, you will be able to describe Market indices, Their types, And applications.
On any major stock exchange, thousands of securities get traded on a daily basis. If you are asked to provide a summary on how the market is moving, how would you answer it?
It would be clumsy for you to check each and every stock, and figure out if they are up or down and report the movement. A better approach is to look at some of the major securities, and if they are moving up, you would say the market is up, else if they are moving down, you would say the market is down. And if there is a mixed trend, you would say that the market is sideways.
This is precisely what a market index does. It acts as a barometer for the markets. An index is a statistical indicator that measures the relative changes in the stock market. It is usually computed from the prices of some of the major stocks traded on an exchange. As the stocks value changes, the index value changes.
It is a tool used by investors and financial managers to summarize market movements. In other words, a stock market index is made of a basket of stocks. Their weights within an index are according to their market capitalization.
The movements in the index reflect the changing expectations of the market participants. If the index value goes up, it depicts that the market participants think that the future will be better. Otherwise, the index value drops if the market participants think pessimistically.
Market indices can be classified in many ways such as World or global indices that include assets from multiple regions. Examples include the MSCI World index and S&P Global 100 index National Indices which represents the performance of the stock market of a given nation. For example, the S&P 500, Nikkei 225 and so on. These indices are also known as broad-based indices.
Then there are sectoral or industry indices which represent the performance of a particular sector in a given financial market. For example, the SPN (S&P 500 Energy) which tracks the energy sector in the US, Bank nifty in India that tracks the banking sector.
Indices are also classified based on assets they track. For example, indices that track a basket of stocks are known as stock indices, whereas, those tracking commodities are known as commodity indices.
Also, an exchange can have multiple indices. Such as one broad-based index and multiple sectoral indices, or combination of them.
Apart from providing the information on overall markets’ performance, indices are used for benchmarking, trading and portfolio hedging.
Benchmarking: Traders usually compare their trading returns with indices returns to see how their trading activity has performed relative to the market.
Trading: Indices in its raw forms are not tradable, as they are not financial instruments. Instead, they merely represent the basket of securities. However, derivative products such as futures and options on indices are traded in most markets.
Portfolio Hedging: Investors usually build a portfolio of ten to twelve securities, which they hold for a long term to enjoy the capital gains. In times of adverse situations such as a housing market crash, which could erode capital in the portfolio, investors can use index products to hedge the portfolio.
Now that you know what are indices and their applications. It’s time to see some examples of some world’s major indices. They are
S&P 500 and Dow Jones Industrial Average, in the US that track major companies trading on the New York Stock Exchange and NASDAQ,
FTSE100 Index of London Stock Exchange,
DAX of Frankfurt Stock Exchange,
CAC40 index of Euronext Paris,
Nifty 50 index of National Stock Exchange of India,
Hang Seng Index of Hong Kong Stock Exchange,
And others as shown on the screen.
That is all for this video. In this video, you learned what market indices are, their types and applications, and seen examples of major stock indices.

Quantra is an online education portal that specializes in Algorithmic and Quantitative trading. Quantra offers various bite-sized, self-paced and interactive courses that are perfect for busy professionals, seeking implementable knowledge in this domain.