Why are indices important?
Traditionally, indices have been used as information sources. By looking at an index we know how the market is faring. This information aspect also figures in myriad applications of stock market indices in economic research. This is particularly valuable when an index reflects highly upto dateinformation (a central issue which is discussed in detail ahead) and the portfolio of an investor contains illiquid securities – in this case,the index is a lead indicator of how the overall portfolio will fare. In recent years, indices have come to the fore owing to direct applications in finance, in the form ofindex funds and index derivatives. Index funds are funds which passively ‘invest in the index ’. Index derivatives allow people to cheaply alter their risk exposure to an index (this is called hedging) and to implement forecasts about index movements (this is called speculation). Hedging using index derivatives has become a central part of risk management in the modern economy, These appli
