MARKET INDICES

Sunday, November 15, 2009

The purpose of a stock market index is to provide a means for measuring the overall movement of share prices in the stock market. The index helps provide market operators with a quick fix on market behavior and the likely trend in share prices. Ideally speaking, the best and most accurate way of measuring the overall price movements of the market would be to use an average based on the individual price movements of each and every share listed on the stock market. This may sound fine in theory but in practice it is physically cumbersome and time- consuming way to measure stock market behaviour. A stock market index provides a better and more practical alternative. The stock market index is an average based on the price movements of a select list of securities that are believed to represent the market as a whole. The usefulness and the value of a stock market index lies in how closely and accurately it reflects the overall and broad movement of share prices in the market