Chapter 8: Introduction to Stock Indices

By now, you know that there are two premier stock exchanges in India – The NSE (National Stock Exchange) and the BSE (BSE Limited). Respectively, they have two primary indexes — the S&P BSE Sensex and the Nifty 50.

But wait…

What is a stock market index?

If you’re a regular fixture on the latest fashions, you may have come across these headlines -

‘Mismatched fashion is on high’

‘This smashing new album is all the rage.’

But how does one evaluate what’s on high or what’s the rage; in other words, how does one determine what’s trending?

Well, it depends on many factors such as the sale of the product, the number of times people looked for the product online, the quality of feedback and mentions of the product on social media and so on.

These factors when put together help you analyse which products or services are currently being preferred and the many reasons why even you should consider the same.

And that's exactly what a stock market index is all about.

It tells you, as an investor, how the economy is doing.

An index gathers information from a wide range of companies across sectors and industry. When put together, this information creates an overall collage or picture that helps you compare the current price levels with past prices to allow you to calculate overall market performance.

Simply put, a stock market index measures the price changes of a specified group of stocks or stocks of a specified sector.

Some of the important types of stock indices in India are as follows:

Let’s understand each one of them. Starting with…

Broad market or Market-cap based indices

It is the collection of largest, most liquid and financially sound companies in BSE Limited (BSE) and National Stock Exchange (NSE).

• The primary index of BSE is the Sensex, which comprises 30 stocks
• The Nifty Index of the NSE consists of 50 stocks

These may also include market-cap based indices which provide you with necessary information regarding a wide variety of listed businesses - big, medium and small. Market Capitalization is the valuation of a company based on the current market price of the company stock and the total number of outstanding shares.

Some of the popular market-cap indices are:

• NIFTY Next50 Index
• NIFTY Midcap 100 Index
• NIFTY Smallcap 250 Index
• S&P BSE 100 Index
• S&P BSE 200 Index

Sectoral indices

The NSE and the BSE also have some indices that consist of companies falling under one particular sector.

Some of the popular sectoral indices are:

• NIFTY IT Index
• NIFTY Bank Index
• S&P BSE Energy                
• S&P BSE FMCG

Thematic indices

These indices are created based on different investment themes such as Indian manufacturing, commodities, Indian consumption, etc.

Some of the popular thematic indices are:

• NIFTY 100 ESG
• NIFTY India Consumption Index
• NIFTY Infrastructure Index
• S&P BSE CPSE
• S&P BSE 500Shariah       
• S&P BSE Bharat 22 Index

Strategy indices

These indices are designed based on quantitative model or investment strategy to provide a single value to the aggregate performance of the underlying companies.

Some of the popular thematic indices are:

• NIFTY Alpha 50 Index
• NIFTY 100 Equal Weight Index
• S&P BSE Enhanced Value Index 
• S&P BSE Low Volatility Index      
• S&P BSE Momentum Index

But why is a stock index important?

A stock market index makes it easier for you to know how the stock market is performing.

Following a stock market index can reveal investment opportunities that even new investors can use to achieve long-term success in the stock market.

There are many reasons why a stock index is important.

• Tracks the most followed stocks to give you an overall sense of the stock market's health.
• Tracks specific sector’s stocks to give you an idea of how a specific segment of the market is performing compared to the overall market as a whole.
• Allows you to simply match the overall market's performance if you do not want to invest in individual stocks.
• It gives you a cost-effective way of earning good returns over a long period by investing in index funds or ETFs that track your choice of stock market indexes.

Additional Read: Taxation on Equity Investments

Summary

• A stock index is a compilation of stocks that helps to measure the performance of a market, sector, or group of companies.
• The two popular stock market indexes in India are the BSE Sensex and the Nifty 50.
• Stock indexes are different from stock exchanges, which are physical locations where stocks are traded.
• A stock index can reveal investment opportunities that can help investors achieve long-term success in the stock market.

Now that you know what the Stock Index is and its importance, let's look at how it's calculated in the next chapter.

Disclaimer:

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