Financial world has grown tremendously in the last few decades. With not only different innovations in terms of financial products, we also have different ways to measure the returns on these financial products and market. A very popular method of calculating or measuring the market and other financial products is what we call an index. It is an indicator to measure something, and in financial world it documents the changes in financial market to a single number. In stock and bond markets, their indices will consist of an imaginary portfolio of stocks and measure the changes in those stocks. There are different ways devised for index calculation and usually involves complex calculations and good understanding of the market. Thus, the organization for this job is an index provider.
Such companies are involved in calculating indices to measure the different classes of assets and are also employed for index maintenance so that they have a proper eye on how these indices are moving. Index providers compile statistics related to various asset classes, industries, and securities, to provide the investors with a means to quantify their investments and understand how the markets are moving. Over the time, they have come up with differentiated and improved methodologies to track the market and the opportunities provides so that they could bundle them in an index. They are constantly monitoring the indices to ensure that any changes in the markets are reflected in the index values. Even in case of an ETF, there is always an underlying index and thus an index provider. The portfolios assembled by the ETF provider will mirror the performance of an underlying index and thus it can provide exposure to entire universe of securities consisting in that index. This achieves the diversity in investment while still having a target focused approach.
The way the financial world is moving is constantly changing but the importance of indices will never lose even when other new and innovative financial products and measures are introduced. Having a closer look on these indices will help you in making the right investment choices and maximizing your wealth. So evaluate continuously and keep on investing!
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