A Beginner's Guide to Stock Market Index : Why Stock Market Index Matter to Investors and Other Market Participants
Is the market going up or down today? Well, if you want to know the pulse of the market, monitoring market index is the best way to do that. But what exactly is a market index? In simple words, a stock market index is like a scorecard that tells us how well the market is doing. There are performance trackers for the entire market as well as certain segments. So, when people talk about the stock market going up or down, they often look at these market index to understand what's happening.
What Does the Market Index Track?
The market index keeps an eye on the price movements of stocks. If the prices of the stocks are going up, it’s a sign that the market is doing well and vice-versa. Market index give you a broad idea of a portfolio of investment holdings. An ideal index is like the mood-reader of the market.
Are all the Market Index the Same?
It would seem that two index following the same market would show the same results. However, that’s hardly the case. The reason being each index uses a particular methodology to gauge the performance of the market. It's like two people are watching a cricket match but they are focusing on different players or aspects, so their observations end up a bit different. Similarly, these index report different results of the same market.
How Many Index Exist in the Indian Stock Market?
- BSE Sensex: Popularly called just Sensex, it is a market index that reflects the performance of companies listed on the Bombay Stock Exchange. This index is calculated using a method called free-float market-weighted methodology. Here, only shares of a company that are available for trading are taken into consideration. Shares that are held by promoters or governments, are not considered for calculation.
- Nifty 50: It gives us a quick look at how the entire market is doing. Just like Sensex, Nifty calculates its index using a method called free float market capitalization weighted index. Nifty 50 is owned by NSE Index, which is a part of NSE Strategic Investment Corporation Limited. It's like a market report card for key companies, helping investors and analysts understand the overall market trends.
Note: The Sensex and Nifty gauge the overall market performance. However, there are several other sectoral index that evaluate the performance of specific sectors.
Why are Market Index so Important?
- Provide Important Information for Benchmarking: Investors, and other market participants often use index performance as a benchmark to understand how the market is faring. Sensex and Nifty provide the benchmark to which you can compare the performance over a specific period.
- Help in Portfolio Management: Both Nifty and Sensex represent how stocks across various sectors are performing. Investors can use these index to diversify their portfolios. When investors mirror the sectoral distribution of these index, they can have a portfolio that is balanced and diversified.
- Offer Sectoral Exposure: Nifty and Sensex comprise stocks from different sectors. This gives investors sectoral exposure, allowing them to align their portfolio with the market's sectoral distribution. This also prevents investors from focusing on one industry when it comes to their investments.
- Help Investors with Decision-making: Of all the market participants, Investor are the ones who keenly closely watch every movement on the stock market. Intraday Investor and day Investor make everyday trade decisions based on economic outlook which is understood from market index.
What are Sectoral Index?
Sectoral index are market indicators that focus on tracking the performance of specific industry sectors. Instead of covering the entire market, these index concentrate on particular segments of related industries. For instance, Nifty Bank reflects the performance of Indian banks whereas Nifty Pharma shows how the pharmaceutical and healthcare related sector is doing.
What are Market-cap Based Index?
These index show the market value of listed companies. For example, BSE and NSE Small Cap 50, consist of companies with lower market capitalisation, in accordance with SEBI rules.