Stock Market Index

A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used to benchmark the performance of portfolios such as mutual funds.

Here are two more definitions to understand Stock Index better:

A collection of stocks whose value is a benchmark for the overall movement of a particular type of stock

A collection of stocks that are tracked over time and used as benchmarks to see how various parts of the stock market are performing.

To understand the Stock index some more watch the video:

Types of indices

Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock market — and by proxy, reflects investor sentiment on the state of the economy. The most regularly quoted market indices are broad-base indices composed of the stocks of large companies listed on a nation's largest stock exchanges.

KSE INDICES
The Karachi Stock Exchange is maintaining three indices, i.e.

1. KSE 100TM Index
2. KSE 30TM Index and
3. KSE All Share Index.

KSE 100TM Index and All Share indices are market capitalization-based indices, whereas KSE 30TM Index is based on Free-Float Market Capitalization.

The KSE 100TM Index

It is a stock index acting as a benchmark to compare prices on the Karachi Stock Exchange (KSE) over a period of time.It was introduced in 1991 and comprises of 100 companies selected on the basis of sector representation and highest market capitalization, which captures over 80% of the total market capitalization of the companies listed on the Exchange. Out of 35 Sectors, 34 companies are selected i.e., one company from each Sector (excluding Open-End Mutual Fund) on the basis of the large market capitalization and the remaining 66 companies are selected on the basis of highest market capitalization. This is a total return index i.e. dividend, bonus and rights are adjusted. The same methodology is applicable in the case of All Share Index, which includes all the listed companies, (except Open-End Mutual Funds).

KSE-30 Index

It is calculated using the “Free-Float Market Capitalization” methodology. In accordance with methodology, the level of index at any point of time, reflects the free-float market value of 30 companies in relation to the base period. The free-float methodology refers to an index construction methodology that takes into account only the market capitalization of free-float shares of a company for the purpose of index calculation.