After reading what stock markets are all about let’s see what an Index means:
Meaning: A stock market index (pl. indices) is an indicator to understand how the markets are performing. When someone says markets are up they are talking about markets in terms of this index. Now just because the index is green or up doesn’t necessarily mean all stocks on the stock market will be up. Here’s why:
An index is made up of selected stocks. It could either be made up of the top 50 best performing stocks, or stocks only from the banking sector, or stocks made up of only small companies. The values of these selected stocks are used to calculate the index value. If the prices of these stocks change then the index value will also change, giving us an idea of how the markets are performing.
Think of it like a size chart for your clothes: At any store you’ll have a generic size chart with sizes S, M and L. But sometimes you fit into an S or sometimes even L right? The size chart talks only about the general clothes but not specific ones. Similarly an index talks only about specific stocks to give an idea about the markets.
India has two stock exchanges:
- N.S.E-National Stock Exchange
- B.S.E -Bombay Stock Exchange
Nifty(or Nifty 50): This is the index for N.S.E and its made up of 50 stocks listed at N.S.E. covering 13 sectors of the Indian economy.
Sensex: This is the index for B.S.E and its made up of 30 stocks listed at B.S.E. covering some of the largest and most actively traded stocks from various industrial sectors of the Indian economy.
Apart from these indices there are other indices too.
- Sectoral indices like BSE Bankex and CNX IT
- Market capitalization-based indices like the BSE Smallcap and BSE Midcap
- Broad-market indices like BSE 100 and BSE 500
1. Sectoral Indices like BSE Bankex & CNX IT: These give us an idea of how a particular sector is performing. Example: BSE Bankex comprises of stocks from the banking sector and it tells us how the banking sector is performing on the B.S.E. And CNX IT comprises of large IT stocks traded on the N.S.E will tell us how the IT sector is performing on the N.S.E.
2. Market Capitalization based indices like the B.S.E. Smallcap & B.S.E. Midcap tells us about the performance of small cap stocks on the B.S.E and mid cap stocks on the B.S.E. respectively.
Example: Company XYZ has 8,000,000 shares outstanding and its current share price is Rs 8. Company XYZ’s market capitalisation= Rs 64 million (8,000,000 shares * Rs 8 per share).
Stocks classified on the basis of market capitalisation:
- Large Cap Stocks: These are stocks of large and well-established companies having a strong market presence and are generally considered as safe investments. Their market capitalisation ranges from 200 billion to 3500 billion. Examples: TCS, Wipro etc.
- Mid Cap Stocks: These are stocks of mid-sized companies that are relatively more risky than large cap as investment options but not as risky as small cap stocks. Their market capitalisation ranges from 50 billion to 200 billion. Examples: Bajaj Corp ltd., Allahabad Bank etc.
- Small Cap Stocks: Small cap companies usually include the start-ups or companies in the early stage of development. These are yet to be discovered and some of them can become big over time. But some can also fail. That is why thorough research is required before investing in such companies. Examples: Pantaloon Retail India ltd was a small cap stock that soared high over 10 years.
3. Broad-market indices like BSE 100 & BSE 500: BSE 100 is designed to measure the performance of the top 100 large-cap companies in India that are listed on BSE. And BSE 500 is designed to measure the performance of the top 500 companies listed on BSE, covering all major industries in the Indian economy.
That was all about indices, if you still have any questions on indices, ask us in the comments section below and MissManage will manage it for you.