The Stock Markets Index

Overview If I were to ask you to give me a real time summary on the traffic situation, how would you possibly do it? 

 Your city may have 1000’s of roads and junctions; it is unlikely you would check each and every road in the city to find the answer. The wiser thing for you to do would be to quickly check, a few important roads and junctions across the four directions of the city and observe how the traffic is moving. If you observe chaotic conditions across these roads then you would simply summarize the traffic situation as chaotic, else traffic can be considered normal.

 The few important roads and junctions that you tracked to summarize the traffic situation served as a barometer for the traffic situation for the entire city!

 Drawing parallels, if I were to ask you how the stock market is moving today, how would you answer my question? There are approximately 5,000 listed companies in the Bombay Stock Exchange and about 2,000 listed companies in the National Stock Exchange. It would be clumsy to check each and every company, figure out if they are up or down for the day and then give a detailed answer.

 Instead you would just check few important companies across key industrial sectors. If majority of these companies are moving up you would say markets are up, if the majority is down, you would say markets are down, and if there is a mixed trend, you would say markets are sideways!

 So essentially identify a few companies to represent the broader markets. So every time someone asks you how the markets are doing, you would just check the general trend of these selected stocks and then give an answer. These companies that you have identified collectively make up the stock market index!