Have you ever heard people talking that the market went up or the market went down?

If you are someone who has basic knowledge about stock market, then you know that these term indicates that the stock market index went up or down.

A stock market index is a group of selected stocks of similar nature which are listed on an exchange. It is a measure which shows the changes that are taking place in the market.

These similar stocks are selected on different criteria like market capitalization, type of industry or the size of the company.

The value of the underlying assets decides the value of the stock market index. This means any change in the value of underlying stocks listed on the stock exchange will reflect a change in the value of the stock market index.

Thus, stock market index reflects the market sentiment and direction of price movement taking place in the market.

Some of the indices in India are as follows:

  1. Broad based indices like Nifty 50 and BSE 100
  2. Benchmark indices like NSE Nifty and BSE Sensex
  3. Sectorial indices like Nifty FMCG Index and CNX IT
  4. Market capitalization indices like BSE Smallcap and BSE Midcap

How are stock market indices developed?

Index is made up of similar stocks grouped together. These stocks are grouped on the basis of market capitalization, type of industry or size of company. The value of the index cannot be calculated by simply taking a sum of the price of all the stocks.

Hence, for the purpose of calculating the value of the index weights are assigned to stocks based on their market capitalization.
These weights represent the impact of the change in the price of a particular stock on the overall value of the index.
There are two common ways of calculating the value of the indices on the basis of weights.

  1. Market-cap weightage : Market capitalization is the product of the number of stocks outstanding of a company and its share price. In this case, the stocks are assigned weight on the basis of their market capitalization.
  2. Price weightage : In this method, stocks are assigned weights on the basis of their price instead of on the basis of market capitalization. Hence, stocks with high price are assigned a higher weight and will have a larger impact on the value of the index compared to the stocks having a lower price.

Why indices are needed?

Following are the reasons why indices are required and are an important part of the stock market:

  1. Indices help in sorting the stocks of different companies based on factors like market capitalization, size of the company, type of the industry they belong to etc.
  2. Indices act as a representative of either of the entire market or of a particular segment of the market.
  3. Indices act as benchmarks and hence can be used to compare performances.
  4. Indices are a reflection of the investors’ mood and psyche. The benchmark index can be used to check if the market has over performed or underperformed.
  5. Investors invest in portfolio of securities resembling index. This is termed as passive investment and cuts down the cost and time required for research and selection of stocks.

What is NSE and BSE?

National Stock Exchange (NSE) – Incorporated in the year 1994, NSE is India’s leading stock exchange which is located in Mumbai. Largest in terms of total and average daily turnover, it provides high quality data and services to investors and clients.
The benchmark stock market index of NSE in India is NIFTY 50, which is owned and managed by IISL (India Index Service and products).
It comprises of 13 sectors and is a collection of 51 stocks listed in it. It is calculated through the method of free-float market capitalization weighted method.

Bombay Stock Exchange Ltd. (BSE) – The fastest stock exchange in the world with a speed of 6 microseconds, BSE was incorporated in the year 1875. It provides a host of services like settlement, clearing, market data services, risk management and education.
BSE SENSEX or simply called as SENSEX is a stock market index which comprises of 30 well established companies listed on Bombay Stock Exchange. It is calculated using free-float market weighted method.

Other indices in India

Other Indices used in India by market players are as follows:

  • Sectoral Indices: This index summarizes the performance of the stocks belonging to a specific market sector and helps to benchmark the performance of a particular sector or the industry.
    Sectoral Index in NSE include: Nifty Auto Index, Nifty Bank Index, Nifty Financial Services Index, Nifty Financial Services Index, Nifty FMCG Index and many more.
    Sectoral Index in BSE include: S&P BSE TECK, S&P BSE Information Technology, S&P BSE Consumer Durables, S&P BSE Oil and Gas etc.
  • Thematic Indices: These indices reflect the performance of various investment themes and identifies specific economic, social, environmental, demographic and industrial trends and their influences.
    Thematic Indices in NSE include: Nifty Commodities Index, Nifty CPSE Index, Nifty Corporate group indices, Nifty Energy Index, Nifty MNC Index, Nifty PSE Index to name a few.
    Thematic Indices in BSE include: S&P BSE GREENEX, S&P BSE CARBONEX
  • Strategy Indices: These indices are designed on the basis of quantitative models or investment strategies and provide a single value for the aggregated performance of a number of companies.
    Strategy Indices in NSE include: Nifty Multi-factor indices, Nifty 50 Equal weight index, Nifty 50 USD Index, Nifty High beta 50 Index to name a few
    Strategy Indices in BSE include: S&P BSE IPO, S&P BSE SME IPO, S&P BSE DOLLEX 30, S&P BSE DOLLEX 100, S&P BSE DOLLEX 200.

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