How Important are the Stock Market Indices In The Financial Markets

Over the years, the importance of indices has grown in the financial sector. Be it the indices for bonds, commodities, or equity. It is now yardstick to measure how the financial markets are performing. Indices help an investor know which financial instrument are doing well and which are not. It has now become the most important measure to check whether their investment is doing well or going down the drain. These indices are calculated by companies known as Index Provider. They are not involved in the task of calculating these indices but also Index Maintenance to check and incorporate the daily changes of the market in the value of indices.

Coming back to importance of indices, one such segment where indices hold a great significance is the stock market. Although stock markets are more dynamic than what the indices suggest, along with the fact that there are different ways of index calculation, causing calculation bias, stock market indices are important to various investors in many different ways. First, it gives an historical perspective of the performance of the stock market which gives investors more insight on their investment decisions. If an investor is not sure about where to invest in individual stocks, indexing can help an investor decide. If the investors want to match the performance of the market, they can simply invest in index mutual funds or index exchange traded funds. This helps the investors to do as well as the market and their portfolio doesn't underperform as well.

As mentioned before, indices can be a yardstick for investors. This can help the investors to compare the performance of their individual stock portfolios. Individual investors who have professional managers handling their portfolio can use indices to check how their portfolio is performing. Finally, the last way in which indices help is as a forecasting tool. By analyzing the historical trend of the indices, an investor can predict the future perform of the market and choose his investment route accordingly.

Sure, there are many ways to compare and measure the performance of your investment and stock market. However indices provide the first step in that path. So, as a smart investor, you don't want to ignore them.

Source : https://thematicinvestings.wordpress.com/2017/01/11/how-important-are-the-stock-market-indices-in-the-financial-markets/