Indian stock market indices reflect the overall picture of the stock market. There are thousands of stocks listed in the stock market & it’s impossible to monitor each of them to know the performance of the market. Indian stock market indices help hurdle this problem.
You need to understand how the market works, how to assess market performance, and what tools are available there to make an informed decision. Indian stock market indices provide data on the average of all stocks to better understand where the collective market is heading.
Indian stocks market indices act as a guiding compass for an investor looking to invest in shares that will yield high returns.
What is Stock Market Index?
If you were to ask a financial advisor how the stock market is doing at the moment, do you expect him to look up every company’s performance and share price to give you an answer? No! Because that would be insanely time-consuming and tough, and for an expert.
That is why indian stock market indices was created to show the current status of the stock market. Indian stock market indices use a method called ‘Sampling”, in which a group of stocks is taken up as a sample to represent the entire stock market.
The change in the Indian stock market indices is a reflection of the changes in the stock market. So if Indian stock market indices go up, it mostly means that investors are buying, and if it falls, it is an indication that people are selling their stocks.
How are Indian stock market indices formed?
In simple words, the Indian stock market indices is an average of the prices of shares of the selected stocks. The two commonly used methods to calculate the securities market index are free float Market Capitalization weightage and the Price weightage method.
To understand these methods first, you need to know what stock weight is:
What is stock weightage?
Indian stock market indices consist of individual stocks and their prices. Since the prices keep fluctuating, a change in the price of one stock is not the same as a change in another stock price. Hence, the concept of stock weightage was created.
Each stock has a different weightage calculated based on its price or free-float market capitalization. A stocks’ weightage is the amount of impact that the stock’s price has on the total index value.
The total market value of a company’s stock is called market capitalization. It is calculated by multiplying the market value of one share by the total number of shares available in the market.
A stock’s weightage in the market cap index is calculated by comparing its market cap value by the total market capitalisation value of the index it falls into.
For example, the market cap value of a stock is 20000, and the index’s total market capitalization value is 2,00,000, then the stocks weightage is 10%
Because the market capitalisation value fluctuates every day, the stock price and its weightage also fluctuate with it.
Since governments and the company’s promoters own a part of the total shares, India uses Free-Float Market Capitalisation, including stocks available for the general public. In the free-float market cap, only the shares available for the general public are used to calculate the index.
As a result, the free-float market capitalisation index is narrower; hence its value is less than that of the market capitalisation index.
As the name suggests, the stock’s weightage is calculated based on their prices in this method. In the price-weighted index, the stock’s weightage is the same as the stock price divided by the total stock prices of the companies mentioned in the index. The higher the price, the greater will be the weightage and vice versa.
Popular Price Weighted Index examples are Dow Jones Industrial Average (DJIA) and Nikkei 225 in Japan.
5 Major Indian Stock Market Indices
1. Broad-based indices
Broad-based indices mirror the performance of the entire stock market. It helps observe the performance of a group of stocks or the whole market.
Since broad-based is a blend of shares of all sectors, it aids the investor in diversifying his portfolio. In addition, broad-based indices give the investor a broad view of the stock market so you can have top company’s shares in your portfolio.
Owned by National Stock Exchange (NSE) Indices limited, NIFTY 50 is a diversified index that incorporates 13 sectors of the economy. Currently, NIFTY 50 was opened at
17236, touched 17,380 and closed at 17,276.
Reference: List of Nifty 50 stocks
NIFTY NEXT 50
The Nifty Next 50 index represents the performance of the ‘next’ 50 stocks, which come after the top 50 stocks. It represents companies that come after the Nifty 50 index and can potentially be added to the NIFTY 50.
NIFTY 100 index shows the financial performance of the top 100 stocks in the stock market. It incorporates significant market capitalisation companies of the stock market and reflects their behaviour. In addition, it represents the combined performance of NIFTY 50 and NIFTY NEXT 50.
2. Sectoral indices
Sectoral indices summarise the data for specific sectors and industries. It helps the investor get a narrow and detailed view of a particular sector. In addition, sector indices help track which shares are outperforming their rival in their sector.
Sectoral indices divide the economy and businesses into groups which allow the investor to analyse how the economy is performing.
The NIFTY bank comprises stocks of the largest capitalised Indian banks. Representing 12 stocks from the banking sector, NIFTY bank provides the investor with a benchmark to evaluate the capital market performance of the bank stocks.
NIFTY IT Index represents the performance of the top IT Indian companies. It contains 10 IT companies like Tata consultancy services, Infosys and HCL technologies etc.
NIFTY Auto reflects the financial behaviour and performance of the top automobile companies in India. It consists of 15 tradable, stock exchange-listed companies. The index contains auto-related sectors like 4, 2 & 3 wheelers automobiles, Auto Ancillaries, etc.
NIFTY FINANCIAL SERVICES
Comprising 20 stocks, the NIFTY financial services index includes banks, financial institutions, housing finance, insurance companies and other financial services companies. It reflects the behaviour of the Indian financial market.
FMCG means Fast Moving Consumer Goods, and these goods are non-durable, mass consumption products that are available off the shelf. NIFTY FMCG contains 15 stocks from this sector.
3. Strategy Indices
Strategy Indices are the type of indices based on the trading strategy. Like other indices, strategy indices also track the financial behaviour of the particle sector, and it measures the yield of a specific trading strategy.
NIFTY DIVIDEND OPPORTUNITIES 50
NIFTY Dividend Opportunities 50 Index exposes the investor to companies that generate a high return while meeting stability and tradable requirements. Consisting of 50 companies, the index aids the investor in choosing top stocks that will generate returns.
NIFTY GROWTH SECTORS 15
Comprising 15 companies, the NIFTY growth sector 15 index exposes investors to liquid stocks from market interest sectors. The weight of individual stocks is capped at 15%.
NIFTY100 QUALITY 30
NIFTY 100 Quality 30 consists of the top 30 stocks selected based on quality score. Every company’s quality score is decided based on financial leverage (Debt/Equity Ratio), return on equity (ROE), and earning (EPS) growth variability analysed during the previous 5 years.
4. Thematic Indices
A thematic index tracks the performance of companies related to particular investment themes. For example, investors can use the thematic index to track the performance and trends of companies of specific sectors like FinTech.
Thematic investing identifies long-term structural trends that will ensure significant economic growth, which will result in good returns on investments. A thematic index helps in the process of tracking trends and researching while planning to invest. Investors use thematic indices to track the performance of themed companies and invest accordingly.
NIFTY commodities index comprises 30 companies and shows the performance of companies representing the commodities sector which includes Oil, Petroleum Products, Cement, Power, Chemicals, Sugar, Metals and Mining.
NIFTY INDIA CONSUMPTION
Consisting of 30 companies, NIFTY India Consumption Index observes the performance of companies representing the domestic consumption sector, including Consumer Non-durables, Healthcare, Auto, Telecom Services, Pharmaceuticals, Hotels, Media & Entertainment, etc.
Petroleum, Gas and Power sectors are included in the NIFTY Energy Index. It consists of 10 companies.
NIFTY CPSE Index has been created to facilitate the Indian Government’sGovernment’s initiative to reduce a few of its stakes in Central Public Sector Enterprises. Being one of the most significant Indian equity ETFs tracks NIFTY CPSE Index, it consists of 10 CPSEs
5. Fixed Income Indices
NIFTY Fixed Income indices provide comprehensive benchmarks for the fixed income market in India, consisting of fixed income assets such as government securities, T-bills, corporate bonds of various credit rating categories, commercial papers etc.
Fixed-income assets provide cash flow in the form of dividends or interest. For example, the investor will be paid before the common stockholders when a company goes bankrupt. When these fixed assets reach maturity, the investors are reimbursed the principal amount along with interest. Some of the most common categories of bonds are GovernmentGovernment & corporate bonds.
NIFTY 8-13 YR G-SEC
NIFTY 8-13 yr G-Sec index is created using the prices of top 5 liquid GOI bonds along with residual maturity ranging from 8 to 13 years and has outstanding issuance exceeding Rs.5000 crores
NIFTY 10 YR BENCHMARK G-SEC
The NIFTY 10 yr Benchmark G-Sec also known as Clean Price Index, is created using the clean price of a 10-year bond issued by India’s Central Government. This index measures the price movement of a 10-year benchmark bond based on clean price only.
How is the Index value calculated?
Sensex and NIFTY are the two major cap indices in India. Both use price-weighted and Free- Float market capitalisation methods to calculate benchmark indices.
Let’s assume XYZ is a company with a total of 1000 shares, free-float shares of which are 600. So the price per share is Rs.70.
Therefore, Market capitalisation= Total numbers shares X Price per share
= 1000 X 70 =Rs 70,000
Free-float factor= Total numbers of Free-Float ÷ Total Number of shares
= 600 / 1000 = 0.6
Total Free-Float Market Capitalisation of Index = 70000 X 0.6 = 42000
Assuming the base value as 5000.
The Index Value = 42,000 x 100/5,000 = 840
Importance of stock market indices
Indian stock market indices are a reflection of the economic condition of a country. When the Indian stock market indices go up, it means that the economy is booming, and when it falls, it indicates that the economy is suffering.
Other than estimating economic growth, here’s how Indian stock market indices aid investors:
1. Helps in Stock Picking
Have you ever been to a restaurant where they serve a buffet?
At a buffet, you’re often confused and overwhelmed with many dishes to choose from because you’re not sure which one would satisfy your tastebuds.
Wouldn’t you ask your friend who has already tasted the food to tell you which one is liked the most and then make up your mind about which dish to eat?
In the stock market world, that buffet system restaurant is the stock market, and the dishes are shares of different companies, your plate is your portfolio, and that trusted friend is the stock market index. Indian stock market indices help you add top stocks to your portfolio.
Reference: 6 tips for stock market trading
2. Helps in Peer Comparison
All benchmark indices help you in comparing a stock with the underlying index to assess its performance. If the stock outperforms the index, it will give you higher returns. If it underperforms, it will provide you with lower returns.
3. Passive Investment
Since many people step into the stock markets with a wish to create a passive income, they dread the research and analysis needed to buy stocks that generate high returns. So instead, these part-time investors invest in stocks and build a portfolio that imitates the stock market index so that they can be on the safer side — also known as index funds.
This technique is highly recommended for new investors who have low risk-bearing capacity.
Read: Importance of investing
4. Represent the stock market
When starting to invest, you cannot go about researching every company’s stocks. Indian indices act as a representative of the market and help you make informed decisions. The BSE (Bombay Stock Exchange) & NIFTY indices assess the performance of the entire stock market. Indices help investors assess the market performance by comparing the past and current share prices.
5. Reflects investor sentiments
Humans are emotional beings, and they also bring their emotions to the stock market. The demands of investors change as per their sentiments, which causes a change in the share price. Stock market indices help you understand other investors’ sentiment, which is essential when it comes to investing.
All Ronaldo fans must know this: during a press conference, the famous footballer has two bottles of Coca-Cola in front of him, which he removes and says, “Drink water.”
This incident cost Coca-Cola a whopping 4 Billion dollars loss. So you see, such minor incidents can change the investor’s sentiments, impacting the prices of shares.
To make sound investing decisions and book profits, one must take advantage of the indices available to study market movement and trends. Of course, investing in stocks always comes with a certain level of risk. Your research, your risk-bearing capacity, your trading strategy and your luck will decide how much returns your investment will receive. However, it’s in your hands to utilise the right type of index at the right time to reap beneficial results.