A stock market index captures the behaviour of the overall equity market. Indices are used as information sources. By looking at an index, one can know how the overall market is faring.
Different investors hold different portfolios of stocks. The index is a lead indicator of how the overall portfolio will fare. Index also serves as a benchmark for measuring the performance of fund managers.
Indices reflect the changing expectations of the stock market about future dividends of corporate sector. When the index goes up, it is because the stock market thinks that the prospective dividends in the future will be better than previously thought. When prospects of dividends in the future become pessimistic, the index drops.
The ideal index gives us instant-to-instant readings about how the stock market perceives the future of corporate sector.
The general type of market index is the broad-market index, consisting of the large, liquid stocks of the country.
In India, BSE- Sensex and NSE Nifty are the most famous indices. Sensex is a composition of 30 stocks where Nifty has 50 stocks. There is also a practice of using an industry index as a benchmark for comparing the returns of the stock portfolio which is related to that industry.
Some of the important indices in India are as follows:
- Benchmark indices like NSE Nifty and BSE Sensex.
- Broad-based indices like Nifty 50 and BSE 100.
- Indices based on market capitalization like the BSE Small-cap and BSE Midcap.
- Sectoral indices like Nifty FMCG Index and CNX IT.
NSE Nifty 50:
The Nifty is the flagship benchmark of the National Stock Exchange (NSE) which is a well-diversified index, comprising top 50 companies in terms of free-float market capitalization that are traded on the bourse. It is supposed to reflect the health of the listed universe of Indian companies, and hence the broader economy, in all market conditions.
Nifty Fifty is computed using the free float market capitalization method, which is essentially the count of shares in active circulation in the market at any given point of time.
The Nifty index was launched on April 22, 1996, with a base value of 1,000 counted from November 3, 1995.
Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE) in India. Sensex comprises 30 of the largest and most actively-traded stocks on the BSE, providing an accurate gauge of India’s economy.
The index’s composition is reviewed in June and December each year. Initially compiled in 1986, the Sensex is the oldest stock index in India. Analysts and investors use the Sensex to observe the overall growth, development of particular industries, and booms and busts of the Indian economy.