The stock market movement is represented through indices that contain the collective share price of the top companies included by the exchanges. You can see there are various indices in the stock market on different stock exchanges representing the whole economy, or a sector or specific categories of shares trading on the exchanges.
There are different types of indices in the stock market that you need to understand. How they work and how they are calculated and major stock market indices in India. Here we are going to describe all these things with a set of examples to make you understand in a better way and update your knowledge about the types of stock market indices.
Topics Covered :
- What is the Stock Market Index?
- How do Stock Market Indices Work?
- How are Stock Market Indices Calculated?
- Types of Stock Market Indices
- 3 Types of Stock Market Index
- Other Types of Stock Market Indices
- Major Stock Market Indices in India
- Summing up
What is the Stock Market Index?
A stock market index is the indicator of all collective shares included in the index representing the combined performance of all shares in that index.
The index could be a mix of various companies from different sectors or different companies from specific sectors. The index is defined by the exchange and can be categorized on various bases like sector or industry, segment and market capitalization.
How do Stock Market Indices Work?
The stock market indices include the weightage average price of movement of all shares included in that particular index. The shares in the index move up and down as per the trend in the market, and the indices show the weighted average of all shares increased and decreased. The index shows the real-time fluctuation of prices reflected collectively.
How are Stock Market Indices Calculated?
The stock market indices are calculated on the basis of trailing the price of shares of selected companies like the top 30 or 50 companies in the country or in sector indices the top companies from the particular sector considering the price based on the weighted average price of each stock. The weightage of price can be assigned to market price or market capitalization.
However, the computation of stock market indices depends on the types of indices and the criteria defined by the exchange. Most of the stock market indices are calculated using the free-float market capitalization. And while calculating the market index, a base year is considered with a base value of the index to find out the current market value of the index.
Types of Stock Market Indices
The stock market indices can be categorized into different types based on various factors. These indices trade on the exchange showing the movement of all the stocks included in the indices to represent the whole economy and sectors.
Usually, there are 3 types of stock market indices – Benchmark Indices, Market-cap Indices and Sector Indices. The purpose of creating different types of indices is to show the market movement of stocks from different categories and sectors.
3 Types of Stock Market Index
Benchmark Indices
This is one of the most common or you can say the well-known type of indices that shows the stock market movement as a whole, and that’s why it is called the benchmark indices. The benchmark index consists of the top listed companies in the country that have the largest market share in the industry and represent the whole economy of the country.
In India, Sensex and Nifty are the two most popular benchmark indices of BSE and NSE stock exchange respectively. BSE Sensex consists of 30 top best-performing stocks, while NSE Nifty includes the 50 top best-performing stocks trading in the exchange. These benchmark indices are considered to compare the performance of the portfolios and investment funds.
Sector-Based Stock Market Indices
After the benchmark indices, the sector-specific indices are other popular types of indices that are based on particular sectors like Banking, IT, Pharma, Healthcare, FMCG etc. These sector-based stock market indices include stocks that belong to a particular sector.
These sector-specific indices show the movement of all stocks from a particular sector or industry representing the trend and performance of a particular sector. In the Indian stock market, you can see the popular sector-based indices are Nifty-IT, Nifty Bank, Nifty PSU, Nifty Pharma and Nifty FMCG trading on the NSE exchange representing the sectorial performance.
Market-Cap-Based Market Indices
The third most popular type of market index is the market capitalization-based index. And the market capitalization is the size of the market value of the company or you can say the total value of all outstanding shares in the market. The stocks that usually have the highest market capitalization are included in the benchmark indices that are also known as large-cap but in large cap other leading or highest market capitalization stocks are included in the index.
Other market cap-based indices are mid-cap and small-cap traded with different names on the different stock exchanges as per their price and market capitalization. On NSE you see the Nifty Mid-cap, Nifty Small-Cap or Nifty Next 50 etc. based on the market capitalization of the companies included or excluded from the index determined by the exchange.
Recommended Read: Small Cap Stocks
Other Types of Stock Market Indices
Apart from Benchmark, Market Cap and Sector Based Market Indices, you can find various other types of indices like Nifty Next 50, Nifty 100 and Nifty 200, Nifty PSU, BSE Sensex 50 and BSE PSU Index that are trading on the stock exchange to represent the group of other top companies from a particular sector or from the particular segment.
The stock exchange can create or customize the various types of indices to represent the movement of various companies as a whole. And these indices are determined based on different methodologies like market capitalisation-weighted index or price-weighted index creation.
Major Stock Market Indices in India
In India, the Sensex and Nifty are the two benchmark indices of BSE and NSE respectively. However, apart from these two broader market indices on both stock exchanges, you can find the market-cap-based and sector-based indices are trading.
In Nifty 50 stocks from around 24 different sectors are included based on their daily trading volume and market capitalization reflecting the performance of the major portion of the entire market.
Similarly, BSE Sensex consists of the stocks of the top 30 companies from around 13 different sectors representing the major portion of the BSE stock market. Both indices are calculated based on the free-float capitalization-weighted method. Both indices are followed by traders and investors or portfolio managers to compare their stock performance.
While market cap-based major indices on NSE are Nifty Midcap 50, Nifty Midcap 100, Nifty Smallcap 50, Nifty Smallcap 100, Nifty Smallcap 250 and Nifty MidSmallCap 400. While on BSE you can find the market cap-based major indices are BSE LargeCap, BSE Midcap, BSE Smallcap, BSE 150 Midcap, BSE 250 Smallcap and BSE MidCapSmallCap 400.
Similarly, on both stock exchanges BSE and NSE you can find the sector based various types of indices. On NSE the sector-based major indices are Nifty Bank, Nifty Auto, Nifty FMCG, Nifty IT, Nifty Metal, Nifty Pharma, Nifty Healthcare, Nifty Oil & Gas, Nifty Reality and Nifty Media etc.
On BSE, the sector-based major indices are BSE Tech, BSE Power, BSE FMCG, BSE PSU, BSE Energy, BSE Auto, BSE PSU, BSE Healthcare, BSE Metal, BSE Oil & Gas, BSE PSU, Financial Services, BSE Utilities and BSE IT. Apart from these major indices, you can also find various other strategy-based indices that has been created to show the movement of certain groups of companies.
Summing up
The stock market indices are the indicators of the entire stock market or representing the performance and growth of specific sectors. The stock market index makes it easier for investors to know which sectors or types of stock are trending in the market. The benchmark index shows the sentiment of the stock market and usually other indices follow the same trend.
Apart from benchmark indices, these indices are created on the basis of the market capitalization of companies, sectors and specific categories. Each market index is an indicator of the stock market and plays a vital role in making the right decision in trading and investing. You can choose to invest in an index-based fund and compare the same with benchmark indices to know the performance of stocks making it easier to evaluate the performance of individual stocks.
Recommended Read: BSE Small-Cap Index
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