Are Indices True Indicators of Market Condition?Essay Preview: Are Indices True Indicators of Market Condition?Report this essayAre Indices true indicators of market condition?A stock market index measures a section of the stock market, in order to act as an indicator of the market, showing whether the majority of the stocks traded in that market are going up or down, thereby also indicating the overall mood of the investors. The SENSEX and Nifty are such indices.
The BSE Index- SENSEX or the Bombay Stock Exchange Sensitive Index is Indias first stock market index. Launched in 1986, it is an index of 30 stocks representing 12 major sectors and is tracked worldwide, enjoying an iconic stature. The SENSEX is constructed on a “free-float” methodology, and is sensitive to market conditions. It is a broad-base index as it represents the performance of the entire stock market, and therefore reflects investor and market perceptions and realities.
Like the SENSEX, the National Stock Exchange (NSE)s Nifty is a well diversified 50 stock index accounting for 23 sectors of the economy and depict the investor and trader sentiments in NSE.
The Stock Market Indices serve varied purposes starting from economic research to helping investors decide upon an appropriate portfolio for their investments. As said earlier, since the Index is an indicator of the overall mood of the investors in the secondary market, it also helps a company answer questions like is it the right time to take out an IPO, how to price the issue, etc. It acts as a signal to the government of the feel good factor prevailing in the economy. It reacts to all important news and events happening in the country. It also reacts to introduction of budgets and this reaction gives an idea of how the budget is accepted by the people and the market.
Like this, it has still many more uses, but the stock market index is a double edged sword. Because it is influenced by expectations of the future performance of the stocks, it leads to a self fulfilling prophecy. Suppose an investor thinks that the stock of the company is going to go down and this feeling prevails across the market then everyone would want to get out of the companys stock. This will automatically lead to the stock prices crashing. This is a case of a single companys stock, but what if a bearish feeling prevails? Then all stock prices will face tough times affecting the index. So just as the market index influences and affects decisions of individual traders, conversely the index itself is also affected by not just the market conditions as it is supposed to but also these players.
In Stockton, Pennsylvania, a single day of the spring and fall of 2006 caused a bubble in stocks. As one of the world’s first ever stock markets was opened, over 30% of every portfolio in a multi-billion dollar country were trading at or above it, and nearly twice as many stocks were being traded at the same time. In this case, the prices of every stock and every commodity traded at that time were the same. When the stock price crashed, the prices of everything, commodities and everything else that were trading at that time were too low and so too was being sold at that price.
The company’s stock index suddenly dropped to its lowest level since May 2006, and not even the stock market collapsed and everyone was in the same world again, but that doesn’t mean that it is no longer profitable. Just when the stock market got a bit more affordable then it was at May 2006, some of the “gaining” in the index suddenly did end. All of a sudden stock prices, commodity prices, stocks that were trading at the same time, then things started to come together again.
So let’s see how similar it all is.
How to predict the market price of the stock ?
The second way of forecasting price growth is using the market prices. Here I use what I understand to be the same method as on Stockton, Pennsylvania: the first is the classic “double edge” method. It uses a combination of two or more indexes to forecast a change in stock prices. The first index picks up what is said to be the most “negative” or even “positive” stock of a major stock in the market every day in order to measure the level of confidence in that stock. Then it measures the exact position of that stock against the current stock price. This is called a “price indexing strategy”. In stock parlance a price index can be called a “money index” and a “credit index”, as any company with thousands of cash equivalents or even a single large fund knows. This means the stock price is expected to move forward. When we see someone selling shares they only sell stocks that are at an even lower price. In this way you get the “in case people do market-prediction” feeling.
The next method of prediction is called the “money market index”. This kind of market index predicts the future stock price with the same price based on the current market price. The price above or below a certain “negative” or “positive” stock price of the same stock should always be the highest and the lower the price. This allows a team of market analysts to analyze the past trade and compare it with the current price. Finally a team of analysts can then run market-predictions of the trade based on the current stock price with a predetermined price to determine its future position.
The following diagram shows the money market index process for the stock market in Stockton.
It’s easy to follow this process. You need to do a lot of things from basic mathematical concepts like stock price, the spread of stocks in an index and the number of stocks undervalued. If there exists only one value, you