An Index is a collection of Stocks. It is composed of Stocks from a particular Industry, Country, Continent or the World. It is also segregated as Developed Markets, Emerging Markets and Frontier Markets (Under-Developed Countries). An Index can be theoretical, or it can have practical applications in the form of Index Funds and ETFs. Indices are Narrow based or Broad-based.
All the Stock Exchanges in the World use an Index as a benchmark and an Indicator of the progress or decline of an Industry or Economy. Typical examples include the BSE Sensex, NSE Nifty, NYSE Dow Jones, London Stock Exchange- FTSE, Tokyo Stock Exchange-Nikkei and Hong Kong Stock Exchange- Hang Seng. These are traditional Indices and are in use since several decades. These are narrow indices and consist of the largest thirty or fifty listed Companies on the Exchange.
Over the decades as Capital Markets developed there was a need to include more Companies in the Index as a broader indicator of Economic progress. Financial Research Organisations such as Standard & Poor, CRISIL, Morgan Stanley, Value Research and others in the industry came out with their Indices to represent a particular group of Companies or Sectors. Stock Exchanges adopted some of these Indices and others were used by Mutual Funds to create Index based Funds. ETFs used still others as a basis of their foundation. Such Indices include S&P (Standard & Poor) 500 in the US, Russell 1000 and Russell 2000 in the US, S&P BSE 500 in India, Shanghai Composite in China, Euro Stoxx 600 in the Eurozone, etc. Such Indices are randomly developed as per the Strategy or convenience of the Research Organisation, but many of them have become essential indicators or Bellwether of a particular group of Companies or Economy.
