Employing stock indices to generate market-beating returns

Mar 11 2014, 08:39 IST
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SummaryIt’s said that a country’s stock indices are the barometer of its capital markets as well as the economy.

do better than the market. An aggregate stock index can be used as a benchmark to judge portfolio performance.

Index-mirroring portfolio

Normally, it is difficult for an individual investor to consistently outperform specified market indices. So, an obvious alternative is to invest in a portfolio that emulates the market. This led to the creation of what is called an index fund, whose purpose is to track the performance of specified market indices over time.

Stock analysts, portfolio managers and individual investors use indices to examine the factors influencing aggregate stock price movements. Another group interested in market indices is that of technical analysts, who believe past price changes can be used to predict future price movements. Technicians plot and analyse price and volume changes for stockmarket indices to assess the direction of future share price.

To conclude, market indices can be used to measure the historical performance of an asset class, and can also be used as benchmarks to evaluate the performance of a money manager overseeing a mutual fund or a pension plan. From an individual investor’s point of view, whenever you invest, you examine numerous market indices that tell you what has happened and how successful you have been. The selection of appropriate indices will depend on how knowledgeable you are when it comes to various series.

* The writer is associate professor of finance and accounting at IIM Shillong

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