Understand the concept, importance, and types of stock market indices to navigate equity markets more effectively.
A stock market index is a statistical measurement and tool that tracks the performance of a selected group of stocks, reflecting the overall health of a specific market segment or the entire stock market.
A stock market index is a grouping of selected stocks designed to represent a particular segment of the market, such as large-cap, mid-cap, sectoral, or thematic stocks.
The index tracks changes in the prices of these stocks, providing a snapshot of how that segment of the market is performing.
Stock market indices serve multiple purposes for various participants in the market:
| Role of Index |
Purpose |
|---|---|
| Benchmarking |
Helps compare individual stock or portfolio performance |
| Market Sentiment Indicator |
Reflects investor confidence or concerns |
| Investment Tool |
Basis for passive investing via index funds and ETFs |
| Economic Indicator |
Indicates the overall economic direction |
Indices help standardise performance measurement, offering clarity to both retail and institutional investors
Stock indices are constructed using specific criteria and methodologies:
Market Capitalisation
Sector Representation
Liquidity and Trading Volume
Free-float Adjusted Shares
Price-weighted Index: Weights assigned based on stock price (e.g., Dow Jones Industrial Average)
Market-cap Weighted Index: Weights based on company’s market value (e.g., Nifty 50, Sensex)
Equal-weighted Index: Every constituent has equal weight
In India, most indices, including Sensex and Nifty 50, are market-cap weighted and free-float adjusted.
These indices act as a reference point for investors to assess the performance of specific market segments.
| Index Name |
Description |
|---|---|
| Sensex |
Tracks 30 large, financially sound companies on BSE |
| Nifty 50 |
Represents 50 top companies across 13 sectors on NSE |
| Nifty Next 50 |
Next set of 50 companies after Nifty 50 |
| Nifty Bank |
Covers top banking sector stocks |
| BSE 100 |
Tracks the top 100 companies on BSE |
| Nifty Midcap 150 |
Represents mid-sized companies across sectors |
Stock market indices come in various forms, each designed to serve a specific tracking or investment purpose. Below are the major types you should know.
Cover a wide range of companies from various sectors.
Examples: Nifty 100, BSE 500
Track stocks from specific industries.
Examples: Nifty FMCG, Nifty Pharma, BSE Auto
Focus on a common investment theme such as ESG, infrastructure, or consumption.
Examples: Nifty India Consumption, Nifty ESG 100
Built based on specific investment strategies such as low volatility or alpha.
Examples: Nifty Low Volatility 50
Indices guide investor decisions by offering benchmarks, trends, and diversification cues.
Investors can benchmark their returns against an index to understand if they are underperforming or outperforming the market.
Indices form the base for index mutual funds and exchange-traded funds (ETFs), enabling low-cost investment options.
Indices include multiple stocks across sectors, reducing the risk associated with holding individual stocks.
Indices highlight which sectors or market caps are performing well, helping investors spot trends.
Stock indices often move in response to:
Corporate earnings
Policy decisions (e.g., interest rates, budget announcements)
Global market cues
Macroeconomic indicators (GDP, inflation, etc.)
A rising index usually indicates positive investor sentiment, while a falling index signals caution or negative outlook.
Each index has pre-defined eligibility criteria. Common considerations include:
Minimum listing history (typically 6 months to 1 year)
High average daily turnover
Free-float market capitalisation
Sectoral balance and representation
Review committees periodically revise index constituents based on these criteria.
Indices are also used to create several trading and investment products:
| Product Type |
Linked to Index |
|---|---|
| Index Mutual Funds |
Invest in the same stocks and weight as the index |
| ETFs |
Tradeable index funds listed on exchanges |
| Index Futures |
Derivative contracts based on index performance |
| Index Options |
Derivative contracts giving right to buy/sell the index |
These products allow both retail and institutional investors to participate in the broader market movement.
While indices are valuable, they also have limitations:
Not all-inclusive: Indices only include select stocks and may not represent the entire market
Rebalancing delay: Changes in fundamentals may not immediately reflect in index composition
Skewed weightage: Heavily weighted stocks can disproportionately affect index movement
Passive exposure: No active management means no tactical moves in volatile times
Understanding these limitations is essential for balanced expectations.
Stock market indices play a crucial role in simplifying and standardising how investors perceive and interact with financial markets. They help track performance, gauge sentiment, and serve as the foundation for several investment vehicles. Whether you are a beginner exploring equities or an experienced trader using derivatives, understanding stock indices is a must. With a solid grasp of their construction, types, and significance, you can make more informed investment decisions aligned with broader market movements.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
It serves as a benchmark to track market performance and aids investors in comparing individual stock or portfolio returns.
Investors cannot buy an index itself, but they can gain exposure by investing in index funds or exchange-traded funds (ETFs) that replicate the index’s performance. These vehicles track the underlying index and provide broad market participation.
Stock indices are updated in real time during market hours to reflect price movements of their constituent stocks. The list of index constituents, however, is reviewed and rebalanced periodically, usually on a quarterly or semi-annual basis.
Sensex includes 30 stocks listed on BSE, while Nifty 50 includes 50 stocks listed on NSE. Both represent large-cap companies across sectors.
A rising index generally reflects overall gains in the prices of its constituent stocks, suggesting positive market sentiment or stronger performance in key sectors. However, it does not guarantee returns for individual investors or specific stocks.
A stock market index is calculated using a weighted average of selected stocks. Weighting can be based on market capitalisation, free-float market value, or price, depending on the methodology defined by the index provider.
Stock market indices serve as benchmarks to track market performance, assess investor sentiment, and compare investment returns. They also guide the construction of investment products like index funds and ETFs, offering a snapshot of market trends.
Index funds and exchange-traded funds (ETFs) track a specific stock market index by replicating its portfolio. Index funds are bought and sold at day-end NAV, while ETFs trade like shares on exchanges throughout market hours.