Index
A market index for example consists of a group of top stocks
traded in the market and its value changes as the prices of its constituent
stocks change. In India, Nifty Index is the most popular stock index and it is
based on the top 50 stocks traded in the market. Just as derivatives on stocks
are called stock derivatives, derivatives on indices such as Nifty are called
index derivatives.
Understanding the Stock Index
An index is a number, which measures the change in a set of values over a period of time.
A stock index represents the change in value of a set of
stocks, which constitute the index. A stock market index is created by
selecting a group of stocks that are representative of the entire market or a
specified sector or segment of the market. It is calculated with reference to a
base period and a base index value.
Stock market indices are meant to capture the overall
behavior of equity markets.
Index movements reflect the changing expectations of the
stock market about future dividends of the corporate sector.
The index goes up if the stock market perceives that the
prospective dividends in the future will be better than previously thought. If
the prospects of dividends in the future become pessimistic, the index drops.
Index derivatives: Index derivatives are derivative
contracts, which have the index as the underlying. The most Popular index
derivative contracts the world over is index futures and index options. NSE’s
Market index, the S&P CNX Nifty was scientifically designed to enable the
launch of index based Products like index derivatives and index funds.
Stock index is difficult to manipulate as compared to
individual stock prices. This is partly because an individual stock has a
limited supply, which can be manipulated.
Index derivatives are cash settled, and hence do not suffer
from settlement delays and problems related to bad delivery, forged/fake
certificates.
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