Stock Market Indices: Definition, Importance & Types Of Stock Market Indices

Stock market indices are used to observe the performance of a segment of certain companies by calculating their weighted average of stocks. It is used to measure a section of the stock exchange to calculate the expected return on a certain amount of investment.

Sensex is included in the Bombay Stock Exchange (BSE) while National Stock Exchange consists of Nifty50, which represents the stock market indices of top 50 companies in India. Let us expand our knowledge of Stock market indices in this article.

Table of Contents

What is Stock Market Index/Indices?

Stock market Indices are indicators used to track the performance of securities within a segment of the stock market. Many financial institutions use these indices to calculate and predict the rate of return on specific investment amounts. It is calculated using weighted average of equities or stocks of several similar companies together under some set of predefined criteria.

For example, in Nifty50 there are 50 companies listed. Now, the average price of the stocks of these companies is used to evaluate their performance and decide the stock market indices.

Analysts use these indicators to predict market trends and future movements. A change in stock market indices can be due to a number of factors, such as change in economic conditions, rise and fall of sectors, etc.

Also Check: Stock Market Investing: Guide On How To Invest In Stock Market

Needs for Stock Market Indices

Stock market indices group similar stocks in an organised manner, which helps predict the best stock based on their performance evaluation. With the help of stock market indices, we can group and sort stocks and check their overall performance to decide which one to invest in. It also omits the need to study every individual stock in the market, which might be an impossible and ineffective method.

These indicators provide a major help to investors by helping them decide which stocks would be more profitable. It helps compare the performance of stocks against their competitors in the sector. It tells whether the given stock can yield profitable returns or is riskier than its competitors.

What is the Importance of Stock Market Indices?

Stock market indices are a crucial component that helps investors decide when and where to invest and how long to keep them. Let us highlight some major importance of stock market indices below.

Stock market indices are used to track the performance of stocks, mutual funds, or other securities in the stock market and compare them to get hold of the best. Investors use these indices to develop their strategies and evaluate performance of their assets.
Stock market indices are one of the most widely studied parameters in finance and investment markets.
Various organisations and institutions use these indices to manage their client portfolios. They also use them to draw performance comparisons between various enlisted companies based on these indices.
Investors use these indicators to analyse market performance, manage their invested assets or plan further investment.
It is also used to uncover various current market trends in different sectors and predict future market movements.
Investors and fund advisors use these indicators to manage risks in the market and take necessary actions based on trends and market movement. Investors can spread their investment across different indices in different sectors to reduce losses from a single sector or asset.
Indicators contribute to market transparency by providing a way to calculate and understand the performance of various segments in the stock market.
It indicates the mood of the market at a particular moment in time. Investors can extract the pattern and make their buy or sell call based on the current trends.
The stock market indices help to select a profitable stock and also calculate its past performances as compared to its competitors.

Also Check: Stock Market News: How To Buy And Sell On BSE NSE?

Top 3 Stock Market Indices in India

Let us learn about some major types of stock market indices used in the Indian stock market.

1. Sectoral Indices

These indices track the performance of specific sectors or industries inside the stock market and provide a concise summary and comparative data to analyse their performance. Some major sectors in sectoral indices are consumer products, healthcare, automobiles, technology, communications, financial, etc.

Companies to be eligible for sectoral indices must have at least 10 minimum stocks within the index. Also, they should be listed in the NIFTY 500 list.

Let us check the types of these sectoral indices with their concerned sectors.

Sectoral Indices in India
Sectoral Index/indices	Industry
NIFTY Bank	Liquid and Large banks of India
NIFTY Auto	Automobile
NIFTY Financial Services	Financial industries
NIFTY FMCG	Fast moving consumer goods
NIFTY Healthcare	Healthcare companies
NIFTY IT	Indian IT Companies
NIFTY Media	Media and entertainment
NIFTY Pharma	Pharmaceutical sector
NIFTY Private banks	Private sector banks
NIFTY Metal	Metal sector

2. Benchmark Indices

These indices check the performance of an investment portfolio as compared to the whole stock market. Benchmarks are standards that are used for comparison in the stock market. Benchmark indices are standards that can be used by investors to analyse the performance of mutual funds, stocks, security or other investments in the stock market.

Sensex is used as a benchmark index on BSE (Bombay Stock Exchange), while NIFTY50 is used as a benchmark index on NSE (National Stock Exchange).

3. Market Cap Based Indices

The cap based indices are also known as capitalization weighted indexes or market value weighted indexes. It is an index that measures the performance or weightage of an index based on its stock’s market value.

The market value of a company can be calculated by multiplying the total number of outstanding market shares by market value of one share. It can be used by investors to predict risk factors and compare their growth targets based on the market value of a company’s stock.

More Types of Stock Market Indices in India

Let us check some more types of stock market indices in India.

Broad market indices: These indices predict the overall performance of the entire stock market. For example, S&P 500 And NASDAQ., FTW5000, Russell 3000, etc are some broad market indexes. These indices resemble market value indices, which means larger companies with huge stocks have greater influence on the market.
Equal weighted indexes: In these indexes, companies listed in a sector start with an equal weight regardless of their size.
Volatility Index: These indexes measure the volatility of the market over a fixed period of time.
Global Index: These indexes measure the performance of companies around the world.

Listing of Stocks in an Index?

There are various criteria that are deployed for listing the stock in a particular index. Let us discuss two major factors for listing an index in the stock market below.

Price: Most of the indices are selected based on their stock prices. Companies with higher stock prices are preferred over companies with low priced stocks.
Market Capitalization: Companies with large market value are given more preference.

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Stock Market Indices FAQs

What are stock market indices?

What are the three main types of stock market indices?

The three major types of stock market indices are sectoral indices, benchmark indices, and market cap based indices.

What are sectoral indices?

These indices track the performance of specific sectors or industries inside the stock market and provide a concise summary and comparative data to analyse their performance.