correlation between index movement and stocks in that index

sudhamayreddy

hi ,
i am a trader from india .i am trading the stocks in NIFTY index. i am not able to figure out the relation between the overall movement of index and the individual stocks in that index . whenever the index is falling most of the stocks in that index are also falling even though technically strong . is this inference is valid ?

markd

Whether the stocks in an index track well with the index itself depends on the composition of the stocks in the index.

If the index capitalization weighted, then the price movements of big companies will influence the direction of the index more than small companies, even if the small companies are more numerous.

If the distribution of capitalizations is pretty even - that is, a similar number of companies across the range of capitalizations, then the charts of most stocks will look like the index, while there will be some stocks doing much better and some doing not nearly as well.

If the distribution is uneven, say, just a few large companies and many much smaller companies, then the charts of individual companies will be much less likely to look like the index. Often when just one or two companies dominate, the index will be almost identical to the big company chart while the others are randomly different.

markd

Here's a link that explains cap weighted index calculations:

https://www.investopedia.com/terms/c/capitalizationweightedindex.asp