Stock Market Index in India: Definition, Types, and Importance

At the heart of understanding market movements are Indian stock market indexes—powerful tools that provide a snapshot of market performance and investor sentiment.

From the widely recognised Sensex and Nifty 50 to sector-specific and market-cap-based indices, we’ll uncover how these benchmarks serve as vital indicators for investors, traders, and market analysts alike. 

What are stock market indices?

The overall performance of a stock group (usually from 30 to 200) that is used to reflect a specific industry or market is what we refer to as a stock market index in India. The indices represent the statistical graph of the underlying stocks that comprise the index, which investors primarily use to analyse the overall market. In simpler terms, it means if the prices of the underlying stocks go up, the index as a whole will also go up as a result. 

The phrases “Sensex” and “Nifty” are used in India to refer to the index in the stock market. An index can be based on diverse criteria, including industry, market cap, and other factors. 

When understanding the Indian stock market, you need to first grasp the concept of the stock market index properly. 

How are stock market indices created?

Similar stocks are grouped together according to industry, market capitalisation, or company size to create a stock market index. The selected stocks are then taken into consideration when calculating the index value.

However, the index value cannot be found by simply adding the prices of all stocks, as each company has a unique price and price change. These weights are market-cap weightage and price weightage, which represent how changes in stock prices affect the value of the index. Stocks are given weights according to market price or market capitalisation to address this.

Also read: What is a stock exchange? Definition, functions, and benefits

Types of stock market indices

In India, there are three primary types of stock market indexes available.

1. Benchmark index

A benchmark index is referred to as the standard way to gauge the performance of the stock market as a whole. For example, the BSE Sensex and the Nifty 50 index are benchmark indexes in India. If a market is underperforming, it is often considered that the Nifty or Sensex is falling.

 2. Sector-specific indices

Sectoral indexes, or indices based on particular sectors (like banking, IT, etc.), are another type among the three. For example, a few of the common sectoral indexes are Nifty Bank, S&P BSE PSU, and others. As their names suggest, Nifty Bank comprises the top banking stocks in India, whereas the S&P BSE PSU index comprises stocks from the PSU sector.

Investors wishing to assess the performance of a particular industry might use a sectoral index. For instance, investors may assess the overall performance of the banking industry by analysing the Nifty Bank index.

3. Indices based on market cap

Not many indexes choose businesses according to their market capitalisation. Based on market capitalisation, the constituents of these indexes have to meet specific requirements. The market value of any publicly traded corporation on the stock exchange is referred to as market capitalisation.

Based on market capitalisation, the constituents of these indexes have to meet specific requirements. A few examples of market-cap-based indexes are the BSE Smallcap and the Nifty Midcap 100.

Major Indian stock market index

• NIFTY 50

The National Stock Exchange (NSE) of India is home to 50 businesses that are included in the market capitalization-weighted NIFTY 50 index. It is regarded as the Indian equity market’s benchmark index. Started in the year 1996, the Nifty 50 gives a holistic view of the market as a whole and focuses on the largest companies in India. 

• S&P BSE Sensex

This free-float market-weighted index is the oldest in India, having been established in 1986. The top 30 biggest and most actively traded equities listed on the Bombay Stock Exchange (BSE) make up the BSE Sensex.

Some of the largest corporations in this nation with the most actively traded equities are the constituent companies featured in this index today.

• NIFTY 500

The first broad-based stock market index in India is called NIFTY 500. The top 500 NSE-listed corporations are part of it. The NIFTY 500 index accounts for around 91.8% of the market capitalisation in free float on the National Stock Exchange (as of March 28, 2024). 72 industry indexes are derived from the NIFTY 500 firms. The index’s industry weights correspond to the market’s industry weights.

• NIFTY Next 50

NSE Indices provides and maintains the NIFTY Next 50 stock market index. It is the rung of liquid securities that follows the NIFTY 50. It is made up of 50 corporations. As of September 29, 2023, the Nifty Next 50 Index reflects around 10% of the free float market capitalisation of the firms listed on the NSE. 

Also read: How to invest in stocks? A beginner’s guide to stock investments

Importance of stock market index

The way the market indexes perform serves as a fairly reliable gauge of how the markets are doing and how investors are feeling overall. These indexes also give investors access to a multitude of information that aids in the development and execution of investment plans.

Get crucial information for benchmarking: 

When evaluating their stock market investments, a lot of traders, investors, and other market participants look to the indexes’ performance as a benchmark. For example, you may compare the real performance of the stocks in your investing portfolio over a specific period with the performance of the Nifty index.

Reduce risk exposure

Investing in an index fund can be a smart way to mitigate your overall portfolio risk, as index funds carry lower risks in terms of underperformance. This is because, in an index, there are different stocks from diverse sectors, making it easier for you to diversify and minimise your risk profile. When compared to direct stock investments, investing in index funds is simpler and carries less risk.

How do I invest in the stock market index?

Investing in the stock market index can be done in multiple ways, including through ETFs (Exchange Traded Funds), mutual funds, and futures & options. You can also replicate the index by investing in the underlying stocks. 

Most investors, however, rely on ETFs and mutual funds that follow a specific index to make the investment process easier. For example, if you want to invest in the Nifty 50 index, you may choose to invest in the NIFTYBEES ETF that follows the index. 

Conclusion

Stock market indices serve as the pulse of the financial markets, offering invaluable insights into market trends, sector performance, and overall economic health. From the broad-based Nifty 500 to the focused Sensex, these indices provide investors with benchmarks to gauge their portfolio performance and make informed decisions.