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Everything About Average Stock Market Return

Introduction:

The stock markets are one of the most lucrative options to invest your money. You can buy and sell shares of various publicly traded companies and earn inflation-beating returns in the long run. Historically, stock markets have provided higher returns than most fixed-interest generating instruments, including Fixed Deposits (FDs), Public Provident Fund (PPF), and National Savings Certificates (NSCs).

However, you must know the stock market return is never guaranteed. It depends on the performance of the precise shares you’ve invested. Several factors determine the price movements in the stock markets.

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The average stock market return

As it turns out, the stock market is one vast entity where thousands of shares are traded daily. While some stocks become multi-baggers, some provide moderate returns in the same period. Some can even cause losses to investors. So, how can you get an idea of the estimated return you can generate?

Although it’s impossible to predict stock market return, you can look at the ‘average stock market return’ to get a rough idea of the profit you can generate through a diversified portfolio. It is the annual growth rate of the value of stock market indices. These indices measure the performance of a collection of shares through a standardised methodology.

The two most popular indices in India are Nifty-50 and Sensex. As per the Global Financial Development Database, the average stock market return for Indian indices stood at 21.5% in 2021. The lowest average return was -37.02% in 2003, and the maximum average return was 119.03% in 1992.

Since the National Stock Exchange (NSE) was incorporated in 1992, the average stock market return for the top 50 companies in Nifty50 stands around 17%. A 2017 Credit Rating Information Services of India Limited (CRISIL) report estimated the average stock market return from a diversified equity portfolio in the last 20 years to be around 18%.

How is the average stock market return calculated?

There is no fixed rule or methodology for calculating average stock market return. Different institutions may follow different methods for the same. Generally, they record the daily percentage changes in the values of the stock market indices before dividing them by the total number of trading days for which the average return is calculated.

The value of the stock market indices may fluctuate due to a variety of reasons, including:

The internal functioning or policy changes of the companies
A sudden increase in demand or supply of shares
Changes in social, political, or economic factors
Incidents like wars, natural calamities, global unrest, etc.

The significance of average stock market return for investors

Knowing the average stock market return can help you set realistic expectations while investing in the shares of companies. It also allows you to plan for your financial goals and decide on your investment amount and horizon accordingly. However, it can sometimes be misleading and not represent the real picture.

It doesn’t consider all stocks

As of 31 December 2023, around 2,113 companies were listed on the NSE. However, calculating the average stock market return is based only on the performance of a few selected shares. Hence, it’s best to look at the average return of a particular stock rather than the average stock market return while making investing decisions.

Two years are not the same

The average stock market return indicates the combined performance of the indices in the long term. However, it doesn’t reflect the changes per year. While the markets tend to perform exceedingly well in some years, they may not give the desired yield in others. Thus, if you are looking to invest for a short term of two to three years, it’s better not to get influenced by the average stock market return.

Consider industry-specific returns

The average stock market return fails to reflect industry-specific returns. It clubs the performance of 10 different shares belonging to various industries and calculates an average return. However, it may happen that investing in a particular industry can fetch excellent returns. Therefore, consider industry-specific returns rather than the average stock market return to accurately estimate your investment's performance.

To conclude

The average stock market return indicates the market’s performance over the long term. While it can help you set realistic expectations for your investment, the figures can fail to represent the real picture. You must prepare a diversified portfolio and conduct proper analysis before investing.

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