Indices are indispensable tools in the virtual landscape of the online stock market, where they are market indicators, performance benchmarks, and the basis for finalizing index-linked investment products. They are all around, whether determining the health of the stock market, assessing the condition of the bond market, or observing the trajectory of commodity prices. A practical example of it is how the varying value of Nifty 50 determines the interest one can earn on market-linked certificates of deposits or capital gains one achieves on an Indian equity exchange-traded fund.
Since now, we know how crucial it is to have indexes as a benchmark for assessing the performance of the overall stock trading and investment market, how about creating our personalized benchmark? Yes! An index that calculates the average of the overall investments in a portfolio by including the entire invested money in different asset classes, calculating the total worth of combined investments, and tracking the price movements of investments in a given period.
In this way, one can create a customized index, known as the personal index, and it can be compared to other benchmark indices like the Nifty 50 to determine whether our index is better than that; if that is the case, then our index is higher and vice versa. For example, suppose our personalized index is at 8%, and the stock market index is up at 6%. In that case, it is a clear sign that we are acing our index as our investments are performing better than the overall market indices. Otherwise, we should understand that we are yet to reach the greener side of the grass.
How does the concept of personal index fit into the current scenario of stock market trends that helps institutional and individual investors redefine their strategies?
- Index investing is the new norm where investors will specifically look for investments that have the potential to replicate the performance of any stock market index. They are ideal solutions for investors who look for cost-effective access to a diversified portfolio of different asset classes.
- A strategic approach to diversification with index investing allows investors to buy a specific segment or a piece of the entire market. This eliminates the need for active management of individual stocks, thereby reducing the cost.
- Technology and dynamic indexes go hand in hand because technology is the prime reason behind the availability of a wide range of investments that can be indexed. Here, the concept of the dynamic index comes into play, which, unlike the market-capitalization weighted index, does the in-depth analysis and tracking. It takes into account the value and quality of stocks and other factors as well. It works wonders in the case of creating a personal index, as investors can measure the performance of their portfolio of unique composition.
- Global trends that are reshaping the trading and investment landscape promote the awareness of tracking benchmark indexes. With the emergence of trading apps and virtual investment platforms, there is a huge shift in investment advice models aimed towards building a diversified portfolio.
Even for a newly listed company where investors and analysts tend to keep a close watch on their IPO, their performance determines which index they belong to. If the stock does well, the index value increases, and vice versa. Therefore, indices are essential to drawing valuable insights about the market sentiments and helping investors navigate the dynamic realm of the stock market.