• HDFC securities
• 27 Mar 2023
• Knowledge Centre

 

 

With more than 5,000 companies across different sectors and industries listed on the Indian stock exchanges, it becomes challenging to assess the performance of each individual stock. Hence, the concept of a stock index was introduced to make it easier to measure the performance of a group of stocks.

What is a stock index?

A stock market index is a statistical tool representing a group of stocks having similar characteristics. The stocks in an index are selected based on a typical criteria like size, industry, sector, etc.

The value of a stock index is tied to the prices of the shares comprised in it. If the price of the stocks included in the index rise, the index’s value as a whole will rise and vice-versa.

An equity index reflects the market sentiment and helps measure the market performance. Indexes are also used for passive investments. There are two primary

How is a stock index created?

Every share in a stock index has a distinct price and a different price range. Hence, a weightage system is adopted for determining an accurate value of the index. There are two primary bases for weightage allocation – market capitalisation and market price.

The weightage allocated to each stock indicates the impact it will have on the index’s value. A higher weightage allocation translates to a higher impact on the stock market index value and vice-versa.

What are the types of stock indexes?

The following are various types of stock indexes in India:

• Benchmark index

There are two benchmark equity indices in India, Sensex and Nifty. Sensex is the benchmark index of the top 30 stocks listed on the BSE, while Nifty50 is the benchmark index of the top 50 shares of the National Stock Exchange (NSE) based on market capitalisation.

Sensex and Nifty are the two prominent equity indices in India and are considered to reflect the performance of the overall Indian equity market.

• Market capitalisation index

Market capitalisation indicates a company’s total market value of all the outstanding shares of a company. Based on market capitalisation, companies can be classified into three categories, small-cap, mid-cap, and large-cap.

A market capitalisation index is comprised of stocks belonging to companies of a specific market capitalisation. BSE Smallcap and NSE Midcap are common examples of market capitalisation equity indices. The nomenclature of the indices gives a fair idea of the type of stocks included in the index.

• Sectoral index

Stocks of various sectors are listed on BSE and NSE. A sectoral index classifies stocks based on the sector or industry they belong to. Referring to a sectoral index helps you gauge a particular sector performance and make suitable investment decisions.

For instance, Nifty FMCG is an index of the shares in the FMCG sector listed on the NSE, Nifty PSU Bank Index comprises the state-run banks trading on NSE, S&P BSE Oil and Gas is the index of shares belonging to the Oil and Gas sector on BSE.

Stock market indices are very useful to gauge the performance of a basket of stocks, which in turn reflects the performance of the overall equity market. Investors can also make investment decisions by comparing the performance of different stocks against the performance of the stock indices.