Index is a globally used financial parameter that denotes the financial condition of all the listed (included in index) companies and the economic value of a country. Though only some companies are included in the index, it is expected to indicate the share value performance of all the companies listed on the exchange.
Security market indexes are very much important to construct. They are used in the following cases
It is used as a parameter of performances of all the listed companies in a country. Moreover it can also be used as a parameter of economic development.
The Index can be used to measure portfolio performance over the time frame. The market index return is mostly used as a benchmark to calculate different portfolio performances.
It is helpful to evaluate the impact of different financial variables over economy and financial condition.
It helps to calculate beta for different companies and generate different market investment strategies.
The contributor companies for the stock indexes are selected based on the following criteria
Only the companies with highest market capitalizations are selected for the same.
Companies from all the separate sectors should be used to calculate the index, so that the index should consider all the sectors while calculating the value.
The liquidity has to be good. All the participating companies should have adequate liquidity with high trading volume and lower bid-ask sread.
The selected companies should represent the economy properly so that the index can be used as a parameter of the economic condition of the country.