A stock market index is a collection of equities traded on the exchange and belonging to the same industry. It is a standardized metric used to track movements in the stock market and reflects the total stock market. Furthermore, indices track the global, national, sectoral, or industrial group economies.
Any change in the stocks affects the index’s performance. Rising stock prices drive the index to climb while falling stock prices cause the index to fall. Thus, stock market indexes assist investors in tracking changes in market direction.
What is an Index?
A stock market index, often known as a stock index, is a statistical metric that measures market fluctuations. It is established by collecting a few comparable stocks from among the securities listed on the exchange. The selection criterion might be a company’s size, market capitalization, or industry type. The index’s total value is affected by changes in the prices of its underlying securities. If prices rise, the index rises; if prices fall, the index falls.
Why do we need Indices?
Stock indices are essential to understanding the market’s attitude and emotions. By examining the index, you may recognize the market’s trend and utilize it to determine which stock will be a winning investment. In addition to deciding which store to invest in, indexes serve as a gauge for peer comparison. When a stock outperforms the index, it is said to have excelled. In contrast, if it has produced lesser returns, it is deemed to have underperformed.
Stock indices can also help you detect trends in a particular industry and make informed investing decisions. They can also assist you in making passive investments, which are investments in a portfolio of assets that closely mirror the index. You can reduce the expense of equities research and selection by investing passively.
Types of Indices in the Indian Stock Market:
What is Sensex?
The word Sensex is rather popular in stock market jargon. So, what exactly is the Sensex? Deepak Mohoni, a stock market specialist, coined the word Sensex. Sensex is a combination of two words, sensitive and index, representing 30 of the largest and most frequently traded equities on the Bombay Stock Exchange (BSE). These stocks belong to some of India’s largest corporations, representing diverse sectors of the economy. The BSE Sensex was initially released on January 1, 1986, and is widely considered the pulse of Indian stock markets.
The free-flow approach is used to calculate the Sensex. This strategy considers the fraction of shares that can be easily exchanged. The BSE then calculates a free-float factor based on the market capitalization of all 30 businesses whose stocks are traded. It aids in estimating free-float market capitalization, and then ratio and percentage are applied to the base index of 100 to get the Sensex value. The following is the formula:
Sensex = (Total free float market capitalization/Base market capitalization) X Base Index Value
What is Nifty?
Nifty is another often-used stock market word. So, what is Nifty? The National Stock Exchange (NSE) index is another popular stock exchange in India. The Nifty 50 index is a grouping of 50 stocks. India Index Services and Products Ltd is in charge (IISL).
The Nifty, like the Sensex, is valued using the free-float market capitalization-weighted approach. The Nifty calculating formula is as follows:
Nifty = (Current Market Capitalization / Base Market Capitalization) X Base Index Value
What is a Demat Account?
A Demat account is required to invest in any index. A Demat account is capable of storing various securities in a dematerialized form. Knowing the aims and objectives of Demat account is crucial to using it to its fullest. A Demat account can be used to safely store different securities for however long you wish to. The advanced security measure taken ensures that it’s close to impossible to lose your securities to hack.
Invest in different sections of the stock market like equity, commodities, futures, IPOs etc. Investing in indexes is a wise choice. The reason behind it is as the market grows, the index will grow too. Demat accounts is a useful and necessary tool in the stock maket.
To conclude,
The Sensex and the Nifty are two of the most often used stock market names. So the next time you hear that the Sensex has risen by 100 points or that the Nifty has fallen by 200 points, you’ll understand how the value is derived and, more significantly, what the main takeaway is.