Index Definition

Meaning/ Definition:

An Index is a reference number, derived from the prices of a basket of constituents like commodities, currencies and stocks. The individual members are given weights depending on their relative importance. The final result is brought down to a base number of 100 and launched for use on a particular date, which becomes the birthday for that index. From that day onwards the index undergoes changes on account of changes in the prices of the individual constituents.

An index serves as a sample or quick indicator based on which users can draw a meaningful conclusion about the overall population.

Index – Example:

The most popular stock index in India, the ‘BSE Sensex’ comprises of 30 stocks that have the highest market capitalisation. Published since January 1, 1986, the Sensex is regarded as the pulse of the domestic stock markets in India. The base value of the Sensex is taken as 100 on April 1, 1979, and its base year as 1978-79. 

Financial Freedom Definition

Financial Freedom means a financial condition where an individual has a stream of passive incomes that can take care of that person’s current lifestyle costs without the necessity for that person to actively engage in an occupation or profession. A financially free person can enjoy life without bothering about working for a living.

Enjoying Financial Freedom

Creating significant passive incomes like interest and dividend, predominantly through investing is the first vital ingredient. Leading a simple lifestyle, keeping the lifestyle expenses low and controlling the ‘Urge to Splurge’ are the second set of essential pre-requite.

Diversity of Portfolio Definition

Diversity of Portfolio

‘Portfolio Diversity’ means spreading the investment risk by investing in a large number of stocks across various sectors. The concept of diversity stems from the popular adage “It is not advisable to keep all eggs in one basket”.  The expectoration is that in a diversified portfolio a majority will produce average results, a small number will result in loss and a few will do extremely well and the final result will be average of this varied performance. Diversified portfolio is recommended for investors who do not know investing.

 

Diversity of Stock Portfolio

Safety through diversity comes only from a really large number. Having 20 or even 50 stocks will not produce the required diversity. A portfolio of 500 stocks only will ensure adequate diversity. Since purchasing and keeping track of such a large number of stocks is impossible for an individual investor, leaving investing in an index fund, a mutual fund that tracks a diversified index like ‘S&P BSE 500’ as the only viable option.

Diversity provides safety but does not create real wealth. Master value investors like Charlie Munger prefer highly concentrated portfolios. In fact his portfolio comprises of just four stocks!

Bull Market Definition

Bull Market

Bull Market is a condition of the stock market when there is widespread optimism in the market, reflected in high prices of stocks. Often this enthusiasm is unjustified and the two crucial ratios, ‘Price to Earnings’ and ‘Price to Book’ shoot up and make stocks expensive for purchasing.

Many innocent investors enter the stock market at these high levels, lured by the possibility of making a fast buck.

For the discerning value investors a bull market is not the right time to buy but the best opportunity to sell the shares bought and painfully accumulated over a long period of time at lower prices and book profit.