What a Stock Index Really Measures

News bulletins often say that ‘the market rose today’. What they usually mean is that a stock index went up. An index is a way of summarising how a group of company shares has done, using just one number.

A basket of shares

A stock index follows a chosen group of shares. India’s Nifty 50 follows 50 large companies listed on the National Stock Exchange, while the Sensex follows 30 large companies listed on the BSE. If most of the companies in the group see their share prices rise, the index tends to rise too.

The number is not a price

An index level such as 24,000 is not a price that you pay for anything. It is a calculated value, measured against a starting point that was set when the index was created. What matters is how it changes. A rise of 100 points means something quite different when the index stands at a low level than when it stands at a high level, which is why changes are usually also reported as a percentage.

Bigger companies count for more

Most well-known indices give larger companies more weight. In simple terms, a company that is worth more on the stock market moves the index more than a smaller one. That means a few big companies can account for a large part of the index’s daily movement.

What an index cannot tell you

An index is a sample of large companies. It is not the whole economy, and it is not every listed share. Smaller companies may move very differently. The companies in an index are also reviewed from time to time, and some are added or removed, so an index is not the same group forever. An index is best seen as a thermometer for one part of the market, not as a forecast.

Key points

• An index summarises a chosen group of shares in one number.
• The level itself is not a price. The change over time is what matters.
• Larger companies usually have more influence on the index.
• An index is a snapshot of large companies, not of the whole economy.