Stock Market Index & Indices – Meaning, Types, Formation, Importance & more
Know everything about Stock Market Index or Share Market Indices here. Check out the various types of Index available in India, understand in detail about top indices, know their functions & more.
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About Stock Market Index
Any index that measures a stock market or a subset of the stock market is termed as a stock market index.
This index helps investors to compare the current price levels with the past price which further helps them to calculate the market performance.
It happens via the stock exchange market where all the trading securities like shares, bonds, derivatives, etc are present.
Any changes in the price of these traded securities have an overall impact on the index value.
This means that an increase in the price will affect the index positively while a decline will eventually result in the index going down as well.
Types of Stock Market Index or Indices
Stock market indices are the statistical measure that shows the changes in the stock market.
There are various type of indices which includes Benchmark indices that consist of NSE Nifty and BSE Sensex.
Others include Broad-based indices Nifty 100 and BSE 100, Indices based on market capitalization like the BSE small-cap and BSE mid-cap and the sectoral indices like the Nifty FMGC index and CNX IT.
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BSE Sensex – Oldest Share Market Index in India
BSE is India’s first exchange to be under the exchange board in the year 1875. From that year it has seen rapid growth in its number of a listed company which has recently surpassed the number 6000.
The total market capitalization of BSE is around Rs.1,24,69,879 Crore. BSE’s most popular equity index is the Sensex which is also termed as the S&P BSE Sensex.
It is among one India’s most widely used market benchmark index. Further, it also has coverage internationally on the European exchange (EUREX) as well as exchanges of the BRICS nation.
The calculation happens by the method of free-float market capitalization. The international coverage also means that any changes in these stocks will also impact the performances of the domestic index.
Thus, this makes it more volatile than any other indices of India. It has 30 of the top scripts which form this index. Currently, Sensex has also started a special platform for trading on SME securities.
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NSE NIFTY – Most Traded Stock Market Index
NSE came into the scene in 1992. It is the leading stock exchange in India. Also, it is the first dematerialized electronic exchange in the country.
It provides the first modern, fully automated screen-based electronic trading system which offers an easy trading facility to investors.
It is the world’s 11th largest stock. Nifty is its major index which consists of the top 50 scrips among the various sectors of India. NSE has a lot more other indices including strategy indices, thematic indices, and fixed income indices.
The total market capitalization of the whole NSE is approximately 12,282,127 crore. Recently NIFTY 50, earlier known as CNX NIFTY was launched by NSE in TAIFEX.
There are essential requirements for being the part of NIFTY 50 that are domicile, liquidity, float adjustment.
The free-float market capitalization method is what we use to calculate it. It is more diversified and more trading happens in Nifty as compared to Sensex.
Formation of Stock Market Indices
An index consists of the same types of stock which are based on market capitalization and the size of the industry. Later, the index value is calculated.
Different stocks have different prices and the change in price in one of the stocks may not be necessarily equal to a price change in some other.
The stocks in the stock market have a certain value and weightage formulated on its market capitalization or the price.
Market-cap weighting and price weightage are two of the accepted indices prevalent in the stock market.
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Importance of Total Market Value in Stock Market Index
The total market value of the stock in a company is the market capitalization.
The calculation includes multiplying the outstanding shares of a company by the current market price of an individual share.
For instance, if an association has 2 crores shares and the current market cost per share is rupee 20. The market capitalization of this association will be rupee 40 crores.
The outstanding share of the company refers to those which belong to the individual shareholders and a firm’s insider holdings.
In this weightage index, the larger the market capitalization, the greater is the impact on the index value.
Eventually, the firms which carry a small market capitalization have a smaller impact. The FTSE 100 is one of the market indexes which follow this method.
In the price-weighted index method, the trading price of the index is based on the trading prices of an individual stock.
The index value depends on the company’s stock expense rather than the market capitalization.
Here, the stocks with more price will eventually lead to a greater impact on the market index. The US Dow Jones Industrial Average (DJIA) and Japan’s Nikkel are examples of this method.
Necessities of Share Market Indices
Indices play a major role in the global investment business. Though, they are highly important, still in times, we could find some flaws.
Any fan of highly passive investing has to be aware of their choice. The stock market is very much dynamic in terms of calculation methods which make a problem for investors as it causes calculation biases.
Keeping aside the various flaws, indices are important in several ways.
Firstly, the market indexes provide the historical perspective of stock market performance; this gives investors more insight into the volatility of the market which further helps in making their risk assessment.
Secondly, the stock market is like a barometer with which the investors can compare their own stock’s performance.
The stock market index also has a very important role to play. It also represents the stock market’s overall health and the course of the market economy.
The stock market index is also a parameter according to which we can judge the mood of the market.
It further helps in passive investment. This is a strategy where the individual tries to gain maximum returns while buying and selling to the minimum amount.
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Investment in Share Market Index
Investors, who desire to minimize their cost of the stock selection, favor to invest in an index portfolio.
The working is like when the investor’s portfolio is like that of the Sensex, and then the returns delivered by the portfolio would be equal to the returns earned by the Sensex.
The stock index also serves as a proxy. Equity investment has a plethora of risk that accompanies it. To analyze and enquire about every stock would be a difficult task.
Here the indices play a prominent role. Here the indices bridge the gap between the investors and their knowledge about the stock market.
These indices can also help in observing the current trends in a certain sector and are also a major help in taking decisions related to investment.
Stock Market Index – Conclusion
Indexes play a major role in the overall market economy of a nation. Their active presence in the economy provides an insight into the economy.
The major role which is being played by the stock exchange is they are investable as well as they are transparent.
Now in recent times, many stock exchanges are trying ethical investing which prefers the security of investors regarding their risk assessment which is further increasing public interest in the stock market.
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