Ever since equity investing has become a popular asset, more and more investors flock to the stock market in hopes of analysing it and making capital gains. But this is easier said than done!
There are about 2,000 companies that are traded on the NSE and over 5,000 companies listed on the BSE. Each of these share prices keeps fluctuating in response to what is happening in the market.
So how can you track the performance of the overall stock market? Do you have to check how each individual share is doing? Or is there an easier method?
This is where a total market index comes in. It provides a panoramic snapshot of the entire stock market and helps investors with their analysis. In this blog post, we will understand the concept of the Total Market Index and its applications.
Understanding Market Indices!
Let’s take a moment to first understand how indices work in the stock market.
Essentially, they’re statistical measures that are used to monitor the performance of either a specific segment or the market as a whole. They’re like barometers and help investors understand what the market trend is.
When we have a fever, a thermometer can help us understand how high our temperature is. Similarly, a stock market index can help investors understand how positive, negative or neutral the market is.
The NSE Nifty 50 and the BSE Sensex are two popular indices in the Indian stock market. Nifty considers the top 50 companies by market cap listed on the NSE and Sensex considers the top 30 companies listed on the BSE.
If the overall mood in the market is bullish, for instance, there are two ways you can understand this. You can either check the performance of all the companies and figure out what the average mood is. Or, you can check Nifty or Sensex, which provides a comprehensive measure of the biggest companies in the Indian stock market.
The latter option is obviously the easier one. Market indices make the investment process a whole lot easier and they help us gauge the health and direction of the financial markets.
What Is a Total Market Index?
A Total Market Index, as the name suggests, provides a complete view of the entire market it represents. Unlike other indices that focus on specific sectors or asset classes, a Total Market Index aims to include almost every publicly traded company in the market.
These indices are characterised by their all-encompassing nature. They don’t discriminate between large, mid-sized, or small companies. They don’t even discriminate among different sectors. This ensures that investors get an oversight over how the emerging players are doing, along with the established giants.
Composition of Total Market Index!
Like other stock market indices, Total Market Indices are also constructed on the basis of certain fixed rules and criteria. It depends on factors like market capitalisation, liquidity and even, weightage.
Let’s take the example of the Nifty Total Market Index, for instance. It includes the 750 shares that are included in the Nifty 500 and the Nifty Microcap 250 indices. As for the weightage, it is based on free-float market capitalisation.
The composition of Total Market Indices is dynamic in nature. As new companies go public and existing ones no longer meet the criteria, the index has to evolve to maintain its coverage. The Nifty Total Market Index is reviewed twice every year and its composition is adjusted based on changes to the Nifty 500 and the Nifty Microcap 250.
Evolution of the Total Market Index in the US!
In the United States, the Total Market Index has a rich history. The Dow Jones US Total Stock Market Index was originally created in 1987. Over time, as the market expanded, so did the index, reflecting the evolving landscape of U.S. stocks. In the last ten years, it grew at an average of 12.14%.
Let’s take a look at how the index has performed over the last ten calendar years.
|CALENDAR YEAR||TOTAL RETURN (%)||PRICE RETURN (%)||NET TOTAL RETURN (%)|
Significance of Total Market Indices:
Here are some of the key uses of Total Market Indices:
You can use Total Market Indices as benchmarks to evaluate the performance of your investment portfolios.
If your portfolio performs better than the benchmark, for instance, it outperforms the market. But, if your portfolio does not measure up to the benchmark, it might be underperforming in comparison to the overall market.
Many financial products such as ETFs and mutual funds are based on Total Market Indices. They replicate the performance of the index and give investors an easy method to gain exposure to the entire market.
Research and Analysis
You can use Total Market Indices to study the broader market trends, correlations between different sectors and the impact of economic events on the broader market.
Examples of Total Market Indices:
Total Market Indices exist in various forms across different regions. Here are some notable examples:
Dow Jones US Stock Total Market Index
This index includes 4,417 companies that are publicly traded in the US. It is based on the weighted float-adjusted market cap principle and adjusted four times a year — in March, June, September and December. It represents about 95% of the US equity market.
CRSP US Total Market Index
Maintained by the Center for Research in Security Prices (CRSP), this index includes almost 4,000 companies. It provides another perspective on the overall US stock market.
FTSE All-World Index
This index includes about 4,000 stocks across the large and mid-cap stocks from the FTSE Global Equity Index series. It ranges across developed as well as developing economies, and it is calculated on the basis of price and total-return methodologies.
When it comes to investments – knowledge is everything. Knowledge of the right sector, the right company and the right time and change the performance of your portfolio. It can the difference between a multibagger and a series of failures.
The Total Market Index can be the source of knowledge in the stock market. You can use it as a ready-made measure of how the entire market on the whole is doing. Whether you’re a beginner or a seasoned investor, it can simplify the process of research and analysis.