Stock market indices measure the performance of the overall stock market or a subset of it, i.e., The index shows all the major changes happening in the market or a particular sector or industry. Stock indices group together similar stocks based on multiple criteria such as market cap, size of the company, type of industry, or sector.
These indices can also be used as a standard against which you can measure the performance of a stock before you start investing in it. In this article, we will see different indices that, as an investor, you must know while online investing in share market.
3 Types of Market Indices You Should Know
A stock market index is created by selecting similar stocks and adding them based on their market capitalization, industry, or company size. The next step involves assigning weights to each underlying stock based on its price or market capitalization. These weights determine a particular stock’s impact on the index whenever its price fluctuates.
1. Benchmark Indices
A benchmark index is a standard for measuring the performance of other securities, funds, stocks, and bonds in the market. This type of index employs the best practices to regulate the companies forming a part of the index. Benchmark indices are a good reference point for judging how the markets work.
The major benchmark index of the National Stock Exchange (NSE) is the NIFTY 50 index. It represents the weighted average of the top 50 equity stocks from the 1600 listed Indian companies on the NSE. The benchmark index for the Bombay stock exchange (BSE) is BSE. It represents the weighted average of the 30 best-performing companies on the BSE.
2. Sectoral Indices
These indices represent the weighted average of stocks from a particular sector or industry. Sectoral indices concisely summarize the performance of a particular sector, such as energy, utilities, materials, technology, automobiles, etc. Investors use the index to measure a stock’s performance against a specific sector.
These indices also compare one sector’s performance with the other and how the economy operates. NSE has set up various sectoral indices, including NIFTY Bank, NIFTY Auto, NIFTY Financial Services (FINNIFTY), NIFTY Realty, and more.
NIFTY Bank captures the performance of stocks of up to 12 large banks. NIFTY Auto considers 15 auto stocks. NIFTY Realty up to 10 stocks. The FINNIFTY Index is up to 20 stocks.
3. Market Cap-Based Indices
Market cap-based indices represent the weighted average of companies based on the market value of the listed company. This market value is also known as market capitalization.
NSE Small Cap 50 and S&P BSE are two indices comprised of companies with low market caps. The performance of these companies proportionately impacts these indices.
Stock indices provide useful parameters to gauge market performance at any time. You can also measure the performance of any stock against a stock index and ensure that the stock is performing well.
If you intend to explore indices like NIFTY 50 and the stocks listed under them, look no further. Dhan provides you with the facility to compare and analyze different stocks and investment options before you start online investing in share market.