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Indices in reference to the stock market is a measure that compares top-performing stocks and represents a hypothetical portfolio. World indices help investors in market comparison and decide which stock or share market to invest in.
Global indices are a type of market indices that help investors make comparisons of market performances of different regions globally. For example, SENSEX is an index representing the stock markets in India.
What are Global Indices?
Global indices keep track of equity performance in share markets of different regions. The MSCI World index follows mid-cap and large equity throughout 23 developed countries and covers around 85% free adjusted market capitalisation. Other crucial global stock market indices include Nifty, CAC, DAX, FTSE, and Sensex.
Simply put, global or world indices evaluate strengths and weaknesses in overall global markets.
Usually, a few values of highly liquid and valuable stocks are taken as a sample from listed stocks and converted into an index. As these stocks move up or down, they determine the actions of global indices.
Most of the time, the world stock market is positive if the global indices seem to be moving upwards, while it can be understood that the global markets are weak at the moment given that the global or world stock indices seem to be moving downwards.
What is the Role of the Global Indices?
1. Global Indices (live) can be treated as a hypothetical portfolio of financial or global market investments. One of the prominent roles that world indices play is that it gives investors an idea of the performances of all stocks in the market.
2. Global indices follow a section of the global financial market and further reflect the market's health and finance. This helps investors understand market performance and health, helping them decide which stock to invest in.
3. Other countries often use global and market indices as a reference for their indices. Hence, global indices work as a role model for other indices.
4. Presented in the form of stocks, bonds, market commodities, etc., index ETFs or funds can be used as a proxy to represent a passive portfolio.
How are Global Indices Calculated?
Global indices are based upon index value calculated on methods decided and approved by the index committee of the specific world share markets. The primary method used to calculate this index is the weighted average mathematics which usually starts with price-weighted indices and then gradually shifts towards market cap weighted.
This ensures that any heavy impact on indices is not exposed because of small stocks. Though one can use various methodologies to construct global indices, the most commonly used indices or methodologies are market cap weighting and free float weighting.
How do Global Indices Affect the Indian Stock Market?
The Indian stock market is undoubtedly influenced by several variables that include both macroeconomic and microeconomic factors. While the macroeconomic variables impact a whole economy or sectors, the microeconomic factors focus on the individual equities in question.
The Indian stock market has become more integrated into the global share market post-globalization, and the after-effects have been very visible. This means that the movements in Indian indices are reflected through the global indices. It is a common phenomenon seen in the stock market when foreign portfolio investors synchronise their decisions on what to buy or sell depending on these indices. It generally means that a huge loss in NASDAQ may lead to further losses in other markets. These losses or decisions, in turn, impact foreign capital flow into India, therefore, having a snowball effect on the Indian currency and Indian index.
Sectors such as IT depend heavily on US corporate spending or US investments, therefore explaining the relation between the global share market and Indian indices. Another example can be that of Indian oil companies depending on the global Brent Crude prices and the worldwide impact.
What are the Benefits of Investing in Global Indices?
1. Investors will be exposed to diversification and understand the international share market. Having a diversified portfolio gives the investor a source of stability even when the market is volatile. Therefore, it is a great option to spread your investment worldwide to ensure a low correlation between your assets, market volatility, and world indices.
2. Investing in the world share market or world indices gives investors options unavailable domestically. Hence, these global indices provide investors with options to choose markets in each sector, such as technology, commodities, engineering, etc. Keeping track of global indices live or international share market live in terms can allow investors to study and decide which world indices are suitable for their preference.
3. A significant benefit that world indices provide investors is a sense of security against liquidations or frauds in the major world indices or world stock market.
4. Investment in the international share market allows currency appreciation for investors. Portfolios, after investing globally, provide benefits of both currency appreciation and diverse, better markets.