What does a weather report tell you?
A weather report provides information about current and upcoming weather conditions, including temperature, rainfall, wind, and humidity. It helps you prepare for the day and stay safe in changing weather.
You might be confused. Why are we talking about the weather report in a blog about the stock market index? This is because they work pretty similarly. Just like a weather report gives you insights into the day’s conditions, a stock market index provides you with an overview of the market’s overall performance and tells you how the market is doing at any given time. With a stocks app, you can easily track these indices and stay updated on market trends.
In this blog, let’s understand the concept of the stock market index, its types, how they are formed, and their usefulness in investing in stocks.
Meaning of Stock Market Index
A stock market index, or stock market indices in a share market, is a statistical measure used to track the performance of a selected group of stocks. These stocks can be from different industries or represent a specific part of the market. The main goal of the stocks index is to provide a summary of how the market is performing overall or in a particular area.
It gives you insights into how well the economy is doing. When the stock market indices go up, investors feel positive about the market. On the contrary, when they go down, it shows investors are feeling negative or not confident about the market.
In India, two major exchanges that dominate the market are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The two prominent market indices from these exchanges are the Sensex on the BSE and the Nifty 50 on the NSE. The history of stock market shows how indices like the Sensex and Nifty 50 have evolved over time.
Types of Stock Market Index
Benchmark Index
The benchmark stock indices consist of Sensex and Nifty 50. The Nifty 50 index represents the top 50 best-performing stocks, and the BSE Sensex index represents the top 30 best-performing stocks. These groups of stocks are called benchmark indices because they follow strict criteria to select the most reliable companies. As a result, they serve as trusted indicators of overall market performance.
Sectoral Index
The BSE and the NSE have several strong indices for evaluating companies in a particular sector. These indices focus on specific sectors. For example, the Nifty IT index covers companies in the information technology sector, while the S&P BSE Healthcare tracks companies in healthcare sector stocks. Investing in a sector index allows you to focus on specific industries.
Market Cap Index
Few indices choose companies based on their market capitalisation. The stock exchange market value of any publicly traded company is referred to as market capitalisation. Examples of some of the market-cap-based indices include the Nifty Midcap 100, the BSE Smallcap, etc.
Other Types of Index
Many other indices include the NSE 100, S&P BSE 100, and S&P BSE 500. These indices include more stocks than the Sensex or Nifty 50 index stocks. Stocks in some indices are riskier, while you prefer lower-risk investments. Investment portfolios are not designed to meet every need. Investors need to stay focused and invest in sectors where they feel comfortable.
However, these are just a few examples, and investors can track many more stock indices. You can follow indices that suit your stock market trading approach depending on your strategy.
How are Stock Market Indices Calculated?
A stock market index is created by selecting stocks based on factors like market capitalisation, business size, or industry. The index value is then calculated, but because each stock has a different price, you can not simply add them up. Instead, weights are assigned to each stock based on its market price or market capitalisation. This weight helps to determine how much each stock impacts the index. To effectively track the indices and stay updated on market movements, you can use the HDFC Sky stock market app.
There are two common methods for assigning weights:
- Market Capitalisation Weightage: In this method, the weight of each stock is based on its market capitalisation (total number of shares in the company x market price per share). Stocks with larger market capitalisation have more influence on the index. In India, many indices use free-float market capitalisation. This method takes into account only the shares available for public trading and does not include those held by promoters or the government.
- Price Weightage: Here, stocks with higher prices are given more weight. This means they have a larger impact on the index’s value than lower-priced stocks.
Also, to keep the index relevant and up-to-date, the list of stocks in it is regularly updated because the market capitalisation of stocks keeps changing. Some stocks are removed if their market capitalisation falls or if they no longer meet the criteria for inclusion, while others are added based on changes in market performance.
Conclusion
Stock market index is an important tool that helps us understand how the market is doing. Whether you’re following benchmark indices like the Sensex or specific ones like the Nifty IT, these indices tell you how the market or a particular sector performs. This can help you make good investment choices.
By looking at the market index, you can spot trends and decide if it’s a good time to buy or sell stocks. Whether you’re new to investing or have been doing it for a while, understanding indices can help you make better decisions when you invest in the stock market.
For a seamless trading experience, first proceed with a Demat account opening online with a reputed broker like HDFC Sky. It is one of the best stock trading apps in India with access to over 3500 listed companies. Now featuring TradingView Charts, the best app for trading using which you can easily track various stock market indices.
Frequently Asked Questions (FAQs)
What does the stock market index indicate?
A stock market index, also known as a stock index, is a statistical measure that monitors market changes. It is created by selecting a small number of equities from among the securities listed on the exchange. The selection criteria depend on the size, market capitalisation, or industry type of the company.
In India, which are the major stock market indices?
The main stock market indices in India are the BSE Sensex and NSE Nifty. They show how the overall market is performing and are useful for new traders. There are also sector-specific indices like Nifty Bank for banking and Nifty IT for technology. For a more detailed view, there are indices like BSE Smallcap and BSE Midcap, which focus on companies of different sizes based on their market capitalisation.
Why are stock market indices important for investors?
Stock market indices help investors understand the overall market performance without tracking individual stocks. They also serve as benchmarks to compare investment portfolios, spot market trends, and make informed decisions.