What is a stock market index? Types of Indices?

A stock market index is a common term that we hear a lot. what is a stock market index? There are thousands of companies listed on the stock market. it is impossible to monitor each company. This is why stock market indices are introduced as a solution. Market indices keep together a selected group of companies stocks and frequently measures them to show the performance of the overall market or a particular segment. a stock market index helps the investor to understand the health and performance of the stock market. also, it enables Investors to study the market sentiments and market directions and also makes it easy to compare the performance of an individual segment and stock.

Stock market Indices

A stock market index is a measurement of a section of the stock market. From among the stocks list on the exchange, select and group some similar together to form an index. The values of the group stocks are used to calculate the value of the index (typically a weighted average). Any change in the price of the stocks leads to a change in the index value. An index is thus indicative of the changes in the market and used by investors and financial managers to describe the market and to compare the return on specific investments.

Also read: The Indian Stock Exchanges

What is the need for Indices?

Indices are very important and unavoidable part of stock market. following are the reasons why it is so important.

• Sorting
• Representation
• Comparison
• Reflection
• Passive Investment

Sorting

There are thousands of companies listed in the stock market. it is very difficult to track each company every day. Sorting them and making them under and index is a good solution. so companies under the same industry are sorted and made an index. for example, Bank nifty is an index that reflects the performance of banking stock.

Representation

A stock market Index act as a representation of the entire market or a particular segment of the market. In India, the BSE Sensex and the NSE Nifty are considered the benchmark indices. Their performance is considered to represent the overall stock market performance of the country.

Comparison

An index makes it easy for an investor to compare the performance of the segment or stocks. Indices can be use as a benchmark to compare performance. For example, by checking the performance of the indices (nifty or Sensex) we can compare the performance of the company or segment. to analyze more deeply, we can take the bank nifty index, if the bank nifty performing well on a particular day, we can compare the bank stocks to its index and analyze its performance

Reflection

Investor sentiment plays an important role in the stock market movements. it is because, if the sentiment is positive, there will be demand for a stock. also, it leads to an increase in prices. It is very difficult to measure investor sentiment correctly. Indices help reflect the investor’s mood correctly, not only just for the overall market, but also even sector-wise and across company sizes. You can easily compare an index with a benchmark to see if has underperformed or outperformed. This will reflect investor sentiment.

Passive Investment

Many investors aim to invest in a portfolio of securities that Is comparable to an index. This process of investment is a passive investment. An index portfolio helps investors cut down the cost of the research and equity selection process. They rely on index performance. As a result, portfolio returns will the index. For example, if Sensex gave 12 % returns in a year, the investor’s portfolio that resembles the Sensex is also likely to give the same amount of returns.

How indices are calculated?

There are different methods are adopted for calculating the index. In India, the free-float market capitalization method is used for calculating the value of an index. there are two main methods are there for index forming, they are

• Market capitalization Weighted Index
• Price weighted Index

Market capitalization Weighted Index

In this method, Stocks are given weightage on the basis of their market capitalization in comparison with the total market capitalization of the index. Market cap is the total market value of a company’s stock. It is calculated by multiplication of the number of outstanding shares the company offered with the current market price of one share. It thus takes into consideration both the size and the price of the stock. Also, the market capitalization-weightage method gives more importance to companies with higher market caps. In India, most indices use free-float market capitalization. In this method, instead of using the total shares listed by a company to calculate market capitalization, only the amount of shares publicly available for trading are used. As a result, free-float market capitalization is a smaller figure than market capitalization.

Price weighted Index

In the price-weighted method, an index value is calculated on the basis of the company’s stock price, and not market capitalization. Stocks with higher prices have greater weightings in the index than stocks with lower prices. The Dow Jones Industrial Average in the US and the Nikkei 225 in Japan are examples of price-weighted indices.

Type of indices in India

We are familiar with NIFTY50 and SENSEX but we are not exactly aware of other Indices. in India there are different type of Indices are their based on their applications, following are the types of Indices.

• Broad Market Indices
• Sectoral Indices
• Thematic Indices
• Strategy Indices

Broad Market Indices

Broad market indices are consisting of the large, liquid stocks listed on the Exchange. it serves as a benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments.

SENSEX (BSE)

The BSE SENSEX is a free-float market-weighted stock market index of 30 well-established and fundamentally strong companies listed on the Bombay Stock Exchange. It was first published in 1986. The 30 t companies which are some of the largest and most actively traded stocks are representative of various industries of the Indian economy. Sensex is the stock market index indicator for the BSE.

Other Indices

• S&P BSE Consumer Discretionary Goods & Services
• S&P BSE Basic Materials
• BSE LargeCap
• S&P BSE AllCap
• BSE MidCap
• S&P BSE SmallCap

NIFTY50 (NSE)

The NIFTY 50 index is the National Stock Exchange of India’s benchmark stock market index for the Indian market. The NIFTY 50 covers 13 sectors of the Indian economy and consists of 50 companies. NIFTY50 is one of the commonly used indexes in India.

Other Indices

• NIFTY Next 50 Index
• 100 Index
• 200 Index
• 500 Index
• NIFTY Midcap 150 Index
• Midcap 50 Index
• Full Midcap 100 Index
• Free Float Midcap 100 Index
• NIFTY Smallcap 250 Index
• Smallcap 50 Index
• Full Smallcap 100 Index
• Free Float Smallcap 100 Index
• LargeMidcap 250 Index
• NIFTY MidSmallcap 400 Index

Sectoral Indices

The Sectorial Indices summarizes the performance of stocks in a specific market sector. for example, NIFTY BANK summarizes the performance of the banking sector. This allows investors to benchmark the performance of a particular stock market sector or industry.following are the sectorial Indices of NIFTY

• NIFTY auto Index
• Bank Index
• Private bank Index
• PSU bank Index
• Financial Services Index
• IT Index
• Media Index
• Metal Index
• Pharma Index
• REALTY Index

following are the sectorial Indices of SENSEX

• S&P BSE Information Technology
• S&P BSE TECK
• CONSUMER DURABLES
• Fast Moving Consumer Goods
• S&P BSE PSU
• S&P BSE POWER
• India Infrastructure Index
• S&P BSE OIL & GAS
• AUTO
• S&P BSE Healthcare
• S&P BSE CAPITAL GOODS
• BANKEX
• S&P BSE METAL
• S&P BSE REALTY

Thematic Indices

Thematic Indexes reflect the performance of various broad investment themes. Them investing seeks to identify specific social, economic, industrial, environmental, or demographic trends and their long-term secular, cyclical and structural influences on the world’s economies and markets.

Following are the Them Indices In NSE

• Nifty Commodities Index
• CPSE Index
• Corporate Group Index
• Energy Index
• India Consumption Index
• Infrastructure Index
• MNC Index
• PSE Index
• Services Sector Index
• Nifty100 Liquid 15 Index
• Midcap Liquid 15 Index
• Nifty Shariah 25 Index
• Nifty50 Shariah
• Nifty500 Shariah Index

Following are the Them Indices in BSE

• S&P BSE GREENEX
• S&P BSE CARBONEX

Strategy Indices

Strategy indices are designed on the basis of quantitative models/investment strategies to provide a single value for the aggregate performance of a number of companies.

Following are the strategy Indices in NSE

• NIFTY Multi-Factor Indices
• NIFT50 Equal Weight Index
• NIFTY 100 Equal Weight Index
• Low Volatility 30 Index
• NIFTY 50 Arbitrage Index
• Alpha 50 Index
• NIFTY 50 Futures Index
• NIFTY 50 USD Index
• Dividend Opportunities 50 Index
• NIFTY High Beta 50 Index
• Low Volatility 50 Index
• NIFTY 50 Dividend Points Index
• NIFTY Quality 30 Index
• NIFTY50 Value 20 Index
• NIFTY Growth Sectors 15 Index
• NIFTY50 PR 1x Inverse Index
• NIFTY50 TR 1x Inverse Index
• NIFTY 50 PR 2x Leverage Index

Following are the Strategy Indices of BSE

• S&P BSE IPO
• SME IPO
• DOLLEX 30
• S&P BSE DOLLEX 100
• S&P BSE DOLLEX 200

Final Thoughts

Stock market Indices plays are a crucial role in the stock market. as we all know there are thousands are companies that are there in the stock market. it is impossible to track all the companies. so these companies are group base on the sector and Indices are form based on these sectors .so fewer efforts are needed for tracking the companies. Indices made stock market tracking easy. in this post, we discussed stock market Indices and different types of indices. I hope this post will help you to know more about Indian stock market Indices.

Happy Investing