Do ‘Nifty’ and ‘Sensex’ ring a bell? They are the predominant Indian stock market indexes, which showcase how the NSE and BSE are performing. While the NIFTY is the National Stock Exchange’s index, SENSEX is the Bombay Stock Exchange’s index.
Now, let’s dive deep into the world of indices and explore what they indicate.
What is meant by a stock market index?
The stock market index measures the performance of a group of stocks. It is used to track the overall performance of the stock exchange or, at times, the overall stock market.
Like the NIFTY and SENSEX in India, there are various global indices such as the ‘S&P 500’, the ‘Dow Jones Industrial Average’, etc.
Why do we have indexes?
- Benchmarking – Indexes serve as a benchmark for the overall performance of a market or a specific sector of the market and help in comparing individual stocks with the broader market.
- Portfolio diversification – Indexes can be used as a way to diversify investments, and, diversification is advice that each investor swears by or, at least, tries to follow.
- Research and analysis – A lesser-known fact is that indexes are used as a tool to study trends and patterns in the market and to identify investment opportunities.
For example, the impact of the Russia-Ukraine conflict on India’s stock market can be easily tracked by following the performance of indexes every day.
- Investment vehicles – Indexes can be used as the basis for exchange-traded funds (ETFs) and index funds, allowing investors like you to gain exposure to the market or specific market sectors with a single investment.
- Measure of the economy – Unsurprisingly, indexes also serve as a measure of the economy. How? By tracking the performance of the companies considered to be representative of the economy.
What are the types of indices?
In India, two indexes dominate the stock market. As an investor, you must be aware of both by now. Indexes exist in a variety of types. Here are the three broad types of indexes.
Broad index
Broad stock market indexes track various stocks across different sectors and industries. These indexes are designed to provide a broad representation of the overall performance of a market or market sector. Some examples of broad stock market indexes include:
- Nifty 50 Index – Part of the NSE, this index tracks 13 sectors of the Indian economy and tracks 50 stocks in the overall market.
- Nifty 100 Index – An NSE index representing 100 Indian companies with the largest market capitalisations.
- S&P BSE Sensex Index – Also known as Sensex, it is the predominant index of BSE and tracks the performance of the top 30 companies listed under this exchange.
- India Vix index – A lesser-known index, it is part of NSE and measures how much volatility the market expects in the near term. Thus, it is also known as Nifty’s Volatility Index.
Sectoral index
Simply put, the sectoral stock market index tracks the performance of stocks in a specific market sector. These indexes allow investors and analysts to track the performance of a particular industry or group of industries. Some examples of sectoral stock market indexes include:
- NIFTY Auto index – Tracks the behaviour of top stocks in the Indian automobile sector. A BSE counterpart of this index is the S&P BSE Auto index.
- NIFTY Bank index – Stocks from the banking industry with the largest market capitalisation are covered here. The BSE counterpart is called S&P BSE Bankex.
- NIFTY Oil and Gas index – Tracks the performance of companies involved in the oil, gas and petroleum business. The BSE counterpart is called S&P BSE Oil & Gas.
Such sectoral indexes also exist for capital goods, consumer durables, FMCG products, etc.
Thematic index
These are often confused with the sectoral index. However, theme-based indexes are stock market indices that track the performance of companies in a specific industry or sector, working on a particular theme, and helping investors gain exposure to market themes and trends.
Here, while the automobile is a ‘sector’, ‘adoption of electric vehicles’ is a particular theme. Some common examples of theme-based indexes include –
- NIFTY housing index – Represents stocks that work in the housing sector. A counterpart of this exists in BSE called the S&P BSE Housing index.
- NIFTY India consumption index – Represents companies with domestic consumption themes, like pharmaceuticals, consumer non-durables, hotels, media and entertainment, etc. A similar index in BSE is the S&P BSE Consumer Discretionary index.
- NIFTY India manufacturing index – Represents companies in the manufacturing segment. The BSE counterpart is called the S&P BSE India Manufacturing Index.
Bottomline
Understanding the concept of indexes and what each index indicates is essential for every stock market trader. Since analysing the performance of each stock individually is close to impossible, studying the movement of indices helps to a large extent in decision-making.
FAQs
Global market indices like the S&P 500 or the Dow Jones Global Index are indicators that track the performance of securities and stocks across the world. Such indexes consist of stocks from different countries and aim to give an overall picture of the global financial market.
For example, the Dow Jones Global Index aims to cover 95% of the stocks’ market capitalisation while publishing its value.
The value of an index is determined by the prices of the stocks it tracks, with each stock having a weighting based on its market capitalisation. The logic goes – the higher the market cap, the more weightage it will have on the index. The value of the index will rise or fall as the prices of the stocks it tracks change.
The free float method of market capitalisation is used while assiging weightage to stocks.
As the name suggests, an index fund is a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific market index, such as the S&P BSE Sensex or NIFTY 100, etc.
The fund’s portfolio is constructed based on its benchmarked index and typically includes all or specific samples of the securities in the index so that the returns of the fund are aligned with that of the index.
NIFTY 50 is not an index fund. It is an index of the National Stock Exchange, indicating the performance of the top 50 stocks listed on it.
However, there are multiple asset management companies that have created index funds based on NIFTY 50, whose portfolio consists of the stocks that are part of the NIFTY 50 index.
Examples of the NIFTY 50 index fund are the Axis Nifty 50 Index Fund, Motilal Oswal Nifty 50 Index Fund, Edelweiss Nifty 50 Index Fund, etc.
No, you cannot directly buy an index.
You can invest in an asset through derivative instruments like options, futures or swaps, or invest in them through index funds and exchange-traded funds.
Index and exchange-traded funds work similarly by investing in the stocks that are part of an index. Derivative contracts on the other hand, allow you to speculate the value of the index and enter into futures or options trades accordingly.