Top 3 Downsides of Equity Index

There is not one but many aspects attached to the Index Services. The priority in all the cases remains the Index Calculation. In order to gain the maximum out of it, it is important to pay attention not only towards the positives but also the negatives. There is requirement to pay attention towards the downside of the Equity Index. Here are the top 3 downsides of Equity Index.

Ambiguity in index calculation

There is no clarity as per to how the stock indexes are calculated. This can be a big problem or the limitation. Taking a price-weighted index, the calculation of the of the index is done, taking into account the sum of the prices of all the stocks which is then divided by divisor which is further adjusted in accordance to the splits, the spinoffs and other market factors. This is therefore not a crystal clear thing.

Relative size not considered

The stocks that carry a higher price tends to have more impact on the movements in the index in comparison to the ones that have a lower price. However, the price-weighted index does not consider the relative size of the industry sector relevant to the stock. This implies that market capitalization is not taken into consideration. It takes into consideration only a small portion.

Inappropriate exposure to small companies

More focus is laid on the companies that have the larger capitalizations as these are considered to influence the level of the index to a greater extent. This means that the index does not give the required exposure to the smaller-cap companies. However, the fact remains that the latter ones are also important for the economy when it comes to calculation of the equity index.

All in all, these are the top 3 downsides of Equity Index. Once you get to know these, it becomes easy for you to understand the market and the risks associated with the same. This further ensures success in all the spheres as well as aspects because you are able to know the market and make predictions in a better way.

Source : https://agriculturetrindex.over-blog.com/2018/03/top-3-downsides-of-equity-index.html