THE INDIAN STOCK MARKET INDICES

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What is a stock market index?

Stock market indices refer to a particular collection of company shares selected based on certain characteristics, a few of which are trading frequency, share size, and others. To depict market direction and change through an index, the sampling technique is used in the stock market.

A?stock market?index - it is a statistical measure that depicts financial market fluctuations. The indexes are indicators of the performance of a certain market segment or the market on the whole.

A stock index is constructed by choosing shares of similar companies or those that match a set of criteria. These shares are listed on the exchange and are already traded. Share market indexes are built built using a range of criteria such as industry, segment, or market capitalization.

Each stock market index tracks the price movement and performance of the shares of the company that comprise the index. This means that the success of any stock market index is proportionate to the performance of the index constituent stocks. In simpler words, if the prices of the stocks in an index rise, the index as a whole will rise as well.

How is it formed?

A stock market index is formed by taking equities with similar market capitalizations, business sizes, or industries and grouping them together. The index is then computed based on the stock pick. However, each stock has a distinct price, and the price range of one stock will not be the same as that of another. This means, the index value cannot be calculated by simply adding the prices of all the stocks.

Thus, we allocate weights to the stocks. Each stock in the index is given a certain weightage depending on its ongoing market price or market capitalization. The weight defines the impact that the stock price exercises on the index value. The two most widely used stock weightage methods are:

a) Market Cap Weightage

Market capitalization refers to a company's overall value on the stock exchange. It is computed by multiplying the total number of outstanding stocks issued by the company by the stock price. However, for a market-cap-weighted index, the stocks chosen based on their market capitalization relative to the overall market capitalization of the index.

In India, several indices use free-float market capitalization. The total number of shares listed by companies is not used to determine market capitalization in this case. Instead, they use the number of publicly traded shares.

• Stocks that have a higher market-cap hold a greater weightage in a market-cap-weighted index.?
• The free-float market-cap method is a variation of the market-cap-weighted method. The variation takes into account only the number of shares that are available to trade publicly, instead of the company’s entire number of shares.?
• The companies which have higher free float market-cap are given higher weightage.?
• Stock market indices like the Nifty and Sensex are determined by using the free-float market capitalisation method.

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b) Price Weightage

In a price-weighted stock index, each company's stock is weighted on the basis of its price per share, and the index is an average value of the share prices of all the selected shares of the companies. Price-weighted indexes give more weight to stocks with greater prices with regards to their contribution to the index value and fluctuations in the index.

The index value is calculated by considering the company's stock price rather than its market capitalization in this technique. As a result, equities with higher prices receive more weightage in the index than the ones with lower prices.

The Dow Jones Industrial Average (DJIA) is one of the most famous price-weighted indices of the world.

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The Need for a Stock Market Index

• Stock market indices aid investors in evaluating the performance of the market at large or a specific sector.
• In another way, it enables investors to refer to stock market indices before taking investing decisions.?
• Investors also compare their portfolios with the performance of the benchmarks, like the Nifty.?
• Stock market indices are often used as benchmarks for index funds and passive mutual funds, which track a specific index.

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Classification of Indices

Stock market indices in India may be classified into three major types: benchmark indices, sector-specific stock market indices, and market-cap-based indices.

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Benchmark Indices

The Nifty 50 index, which constitutes of the shares of top 50 best-performing companies, and the BSE Sensex index, which constitutes of the shares of top 30 best-performing companies, are indicators of the NSE and the BSE, respectively. This group of equities is known as a benchmark index as they provide the best standards to regulate the companies they select. As a result, these are referred to as the most reliable sources of information about how the market is performing in general.

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Market Cap Indices

Some indices select companies based on their market capitalization. Market capitalization means the market value of any publicly traded corporation in the stock exchange. Indices like the S&P BSE and NSE small cap 50 are consist of companies with a low market capitalization as pinned down by the Securities Exchange Board of India (SEBI).

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Sectoral Indices

Both the?BSE?and the?NSE?have certain number of strong indicators that gauge shares in a given sector. Indices such as the S&P BSE Healthcare and NSE Pharma are referred as good indicators of fluctuations in the pharmaceutical sector. Another significant example is the S&P BSE PSU and Nifty PSU Bank Indices, which are indices of all the public sector banks listed in India.

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Other Kinds of Indices

Several other indices, such as the S&P BSE 500, NSE 100, and S&P BSE 100, are larger and have a more number of companies listed on them. You may have a low-risk attitude, but?Sensex?stocks may have a high-risk factor. Investment portfolios are not created by keeping in mind the desire to fulfil the demands of all. As a result, investors must focus and invest in areas where they feel confident and secure.

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Major Indian Indices

Nifty

1. The Nifty, also termed as the Nifty 50, is the benchmark index of the NSE.?
2. The Nifty constitutes the top 50 shares listed on the NSE.
3. It is computed using the free-float market capitalisation-weighted method.?
4. The Nifty is younger to the Sensex, as it was first determined in 1995, starting with a base value of 1995.?
5. The current value of the Nifty reflects the total market value of the 50 stocks in the index relative to the base value.

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Sensex

1. The Sensex, also referred to as the S&P BSE Sensex was first computed in 1978–1979 and is the benchmark index of the BSE.?
2. The Sensex consists of the BSE’s 30 most financially stable and sound companies and is calculated using the method of free-float market capitalisation-weighted.?
3. The Sensex was first determined in 1978–1979 with base value of 100.?
4. Being a benchmark index, it allows investors refer to Sensex to evaluate the performance of the Indian stock market.

Credit: Sujoy Banerjee

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