Stock Market Index - Major Stock Market Indices

All the major stock market indices provide insight into the market performance and help understand stock market sentiments. The stock market indices are statistical measures that indicate changes within the market. It is a hypothetical grouping of investment holdings representing part of the actual financial market. Stock market investors prefer to follow market indices to study the movement in the market. Let us read more about the stock market index, types of stock market indices, importance of stock market index, major stock market indices, and more in detail.

What is the stock market index?

A stock market index acts as a performance indicator and tool for investors to track stock market changes. It shows the performance of a specific segment of the market or the market as a whole. A stock market index is created by selecting stocks from companies that are similar or meet certain criteria. These shares are already listed and traded on the stock exchange. Based on different factors like industry type, market segment, or company size, an index can be built.

Each stock market index monitors the price movement and performance of the stocks that are part of the index. If the price of the stocks in the index increases, the index also rises. The performance of an index directly depends on the performance of the individual stocks in that particular index.

Formation of an Index

Combining equities with similar business sizes, market capitalizations, or industries is formed to become a stock market index. Based on the stock pick the index is computed. Each stock has a distinct price and the price range for one stock will not be the same as the price range of another. As a result, you cannot simply add the prices of all the stocks to determine the index value.

Based on the stock’s current market price or market capitalization, each stock in the index is given a specific weight. This is the process of assigning weights to stocks. This weight defines the extent to which the price changes in a stock affect the overall index value. Market cap weightage and price weightage are the two most important types of stock market indices.

• Market cap weightage: The stocks are selected based on their market capitalization relative to the overall market capitalization of the index is termed market cap weightage.
• Price Weightage: The index value is calculated utilizing market capitalization rather than the stock price of the company. A price-weighted index gives more weightage to shares with higher prices.
• Equal Weightage: Regardless of their price or market capitalization, all stocks in equal weightage are assigned the same weight.

Types of Stock Market Indices

Sectoral index

Both the NSE and the BSE have strong indicators that measure companies within a sector. Indices like the S&P BSE Healthcare and NSE Pharma are good indicators of changes in the pharmaceutical sectors. The S&P BSE PSU and Nifty PSU Bank Indices, are indices of all listed public sector banks.

Benchmark index

The Nifty 50 index consists of the 50 best-performing equities and is the indicator of the National Stock Exchange. The BSE Sensex consists of the 30 best-performing stocks is an indicator of the Bombay Stock Exchange.  The group of equities is known as a benchmark index as they employ the best standards when it comes to regulating selected companies. They act as reliable sources of information about how the market works in general or the performance of the market.

Market Cap Index

Market capitalization refers to the stock exchange market value of publicly traded corporations. Few indices choose companies based on market capitalization. As defined by the Securities Exchange Board of India (SEBI), S&P BSE and NSE small cap 50 are companies with a lower market capitalization.

Other kinds of index

S&P BSE 500, NSE 100, and S&P BSE 100 are broader indices that include a large number of stocks.

Major Stock Market Indices

The following are the major stock market indices monitoring different stock markets in different sectors and industries:

• Nifty 50 
  Nifty 50 is a market capitalization-weighted index that consists of the largest 50 listed companies on the National Stock Exchange.
• SENSEX
  Sensex consists of the top 30 companies listed on the Bombay Stock Exchange representing the industries.
• S&P 500
  The S&P 500 is one of the world's largest and most tracked indices. It is market capitalization-weighted capturing the performance of 500 large-cap companies listed on U.S. exchanges.
• Dow Jones Industrial Average or DJIA
  Dow Jones Industrial Average is one of the oldest stock indices and consists of 30 big-cap diversified companies in the U.S. based on a price-weighted stock index.
• NASDAQ Composite
  NASDAQ is one of the largest indexes with over 3,000 stocks traded.  It is heavily influenced by tech companies making it a key indicator of the health and performance of the technology sector.
• FTSE 100
  FTSE 100 is a benchmark of the UK economy. It measures performance of the of the largest 100 companies listed in London Stock Exchange.

Why are stock market indices required?

• Easy Stock-picking
  There are numerous stocks listed on the stock exchange. It is not easy to differentiate one stock from another without any benchmark. With the help of stock market indices, you can classify the stock based on the type of industry, sector, size of the company, etc.
• Comparing the stock
  An index gives an idea of the stock performance allowing you to compare different stocks. This helps stock investing much easier. You can compare the higher-return stocks to the index, to understand whether it outperforms the index.  
• Proxy
  There is always a risk in investing in equity. However, analyzing each stock to reduce volatility is not an ideal approach. In India, the BSE Sensex and the NSE Nifty act as benchmark indices.
• Reflection of Investor Sentiments
  When investors are actively investing in equity markets, understanding investor sentiments becomes important. For example, if you are interested in investing in a particular stock, you must have a complete understanding of the factors influencing its price dynamics.

End Note
Understanding stock market indices helps in researching the stocks that are profitable for investing. Using the stock market indices, you as an investor can make investments smoothly while assessing the risk associated with it. To invest, you can open a Demat account with BlinkX with zero brokerage fees.