In simpler words it means that various stocks are listed on an exchange and similar stocks are grouped together and an index is formed. The grouping may be done on the basis of market capitalization, company size, basis of sector etc.
It is considered as an indicator that provides us with an idea about the market condition. NIFTY and SENSEX both are two major index in India.
Most of the stock trading in India is done on Bombay Stock Exchange (BSE), Mumbai& National Stock Exchange of India Ltd (NSE), Delhi.
UNDERSTANDING ON NIFTY & SENSEX
|Number of stocks grouped together||Top 50||Top 30|
|Relation with NSE & BSE||Stocks related to National Stock Exchange, Delhi||Stocks related to Bombay Stock Exchange, Mumbai|
|Meaning of NIFTY & SENSEX rising||It means prices of major stocks listed on NSE has gone up||It means prices of major stocks listed on BSE has gone up|
Some of the important indices in India are:
- BSE Sensex and NSE Nifty
- Sectorial indices like BSE Bankex and CNX IT
- Market capitalization-based indices like the BSE Small-cap and BSE Midcap
- Broad-market indices like BSE 100 and BSE 500
- Mid Cap Indice for all mid cap stocks
- Small Cap Indice for all small-cap stocks
- Sector based Indice Example IT, Pharmacy etc.
If any index is going up then it means that the stocks from that index are also going up.
WHY DO WE NEED INDICES?
As n number of shares are available in the market and it will get very difficult for an investor to pick stocks from the huge list. Indices group the stocks of similar category, or on basis of size etc. Thus, this sorting helps the investor to pick the stock of his/her choice easily.
NIFTY and SENSEX both are two major index in India considered as representative of the overall performance of the market.Example: IT index will represent the all IT stock companies in the market.
Index acts as a great tool to make comparisons for the investor to compare the performance of any stock. Example- Sensex in India acts as a benchmark and investor can compare the stock price with the Sensex.
HOW ARE STOCK INDICES FORMED?
Stock indices are formed by grouping the stocks of the same industry, market capitalization, the size of the company, same sector etc. Once the decision is made in regards to the stocks, then the value of the index is calculated.
In India, the free-float market capitalization is commonly used instead of prices to calculate the value of an index.Two of the common indices are:
- Market capitalization-weighted index
Before understanding these indices one must know “What is stock weight?”
As we know tindex is created by selecting a group of stocks. But it does not mean that if there is 4% change in the price of one stock than it does not mean that other stocks will have the same impact. Therefore, index value cannot be calculated by simply adding prices of all stocks.
Thus, in an index, each stock is given particular weight based on the market capitalization and price of the stock.
- Market-cap weightage
It refers to the company’s market value of stock. Calculation is as follows:
Total Market Value = Share Price X Number of shares floated in market
As a result size and price of stock both are considered.
Note- As the price of a share keeps on fluctuation so will be the market capitalization. Although,it’s a marginal change.
- Price weightage
This method is used to calculate index value based on the price of stock. Higher value stocks have high weightage and low-value stocks have less weightage.