Types OF Index In The Indian Stock Market

Sectoral Index

Both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have a number of strong indicators that gauge companies in a given sector. These indices are a useful tool for investors who want to track the performance of a particular industry or sector.

Some examples of these indices include:

• The S&P BSE Healthcare Index, which tracks the performance of the top 25 healthcare companies listed on the BSE.
• The NSE Pharma Index, which tracks the performance of the top 30 pharmaceutical companies listed on the NSE.
• The S&P BSE PSU Index, which tracks the performance of all listed public sector undertakings (PSUs).
• The Nifty PSU Bank Index, which tracks the performance of the top 12 PSU banks listed on the NSE.

It is important to note that not all industries have equivalent indices on both exchanges. For example, there is no BSE index that tracks the performance of the technology sector, while the NSE does not have an index for the consumer staples sector.

However, even if there is no equivalent index on the other exchange, investors can still track the performance of a particular industry by using a broader index, such as the Nifty 50 or the Sensex.

Overall, the availability of strong sector-specific indices is a key factor that distinguishes the BSE and the NSE. These indices provide investors with a valuable tool for tracking the performance of the industries they are interested in.

• The indices are calculated using a variety of factors, such as the market capitalization of the companies in the index, their trading volumes, and their price movements.
• The indices are updated on a regular basis, typically on a daily or weekly basis.
• The indices can be used to compare the performance of different industries or sectors.
• The indices can also be used to track the performance of a particular company over time.

Benchmark Index

The Nifty 50 and the BSE Sensex are two of the most important stock market indices in India. They are both benchmark indices, which means that they are used to measure the performance of the overall stock market.

The Nifty 50 is composed of the top 50 most actively traded stocks on the National Stock Exchange (NSE). The BSE Sensex is composed of the top 30 most actively traded stocks on the Bombay Stock Exchange (BSE).

Both the Nifty 50 and the BSE Sensex are calculated using a free-float market capitalization methodology. This means that the weight of each stock in the index is determined by its market capitalization, but only the shares that are actually available to trade are included.

The Nifty 50 and the BSE Sensex are both widely followed by investors and traders. They are used to gauge the overall health of the Indian stock market, and they are also used to benchmark the performance of mutual funds and other investment products.

In addition to being benchmark indices, the Nifty 50 and the BSE Sensex are also considered to be good indicators of the overall health of the Indian economy. This is because the stocks that are included in these indices are all from large, well-established companies. As a result, the performance of these indices is closely correlated with the performance of the Indian economy.

• The Nifty 50 was launched in 1996, while the BSE Sensex was launched in 1979.
• The Nifty 50 is a more liquid index than the BSE Sensex, which means that it is easier to buy and sell shares in the Nifty 50.
• The Nifty 50 is also a more diversified index than the BSE Sensex, which means that it is less sensitive to the performance of any one sector or industry.

 Market Cap Index

Market capitalization is a measure of the size of a company, calculated by multiplying the number of shares outstanding by the current share price. Companies with a lower market capitalization are often referred to as “small-cap” companies.

M. cap ( Market Capitalisation ) = Total outstanding shares* current share price ( LTP)

There are a number of indices that select companies on the basis of their market capitalization. These indices are designed to track the performance of small-cap companies.

Some of the most popular small-cap indices in India include:

• The S&P BSE SmallCap 50 Index
• The NSE SmallCap 50 Index
• The BSE 100 MidCap Index
• The NSE MidCap 100 Index

These indices are all calculated using a free-float market capitalization methodology. This means that the weight of each stock in the index is determined by its market capitalization, but only the shares that are actually available to trade are included.

Small-cap indices are often used by investors who are looking for growth opportunities. This is because small-cap companies are typically more volatile than large-cap companies, but they also have the potential to grow at a faster rate.

• The S&P BSE SmallCap 50 Index was launched in 2001, while the NSE SmallCap 50 Index was launched in 2005.
• The S&P BSE SmallCap 50 Index is a more liquid index than the NSE SmallCap 50 Index, which means that it is easier to buy and sell shares in the S&P BSE SmallCap 50 Index.
• The S&P BSE SmallCap 50 Index is also a more diversified index than the NSE SmallCap 50 Index, which means that it is less sensitive to the performance of any one sector or industry.

Market Cap Weightage index

Market capitalization is a measure of the size of a company, calculated by multiplying the total number of outstanding shares by the current share price. Market capitalization is often used as a proxy for the overall value of a company.

In a market-cap-weighted index, the stocks are chosen based on their market capitalization relative to the overall market capitalization of the index. This means that the stocks with the largest market capitalizations will have the largest weights in the index.

For example, let’s say that a stock has a market capitalization of Rs. 100,000, and the underlying index has a total market capitalization of Rs. 2,000,000. In this case, the stock will be given a weightage of 50%. This means that the stock will contribute 50% to the movement of the index.

It’s important to note that the market capitalization of a company can change every day, as the share price changes. This means that the weight of a stock in a market-cap-weighted index can also change every day.

In India, some indices use free-float market capitalization. This means that only the shares that are actually available to trade are used to calculate the market capitalization of a company. This is done to prevent companies from artificially inflating their market capitalization by issuing a large number of shares that are not actually available to trade.

Price Weightage index

A price-weighted index is a type of stock market index in which the weight of each stock in the index is determined by its price. This means that the stocks with the highest prices have the largest weights in the index.

Price-weighted indexes are also known as price-only indexes or price-sensitive indexes.

The most famous price-weighted index is the Dow Jones Industrial Average (DJIA). The DJIA is a price-weighted index of 30 large, well-established companies listed on the New York Stock Exchange.

The formula for calculating a price-weighted index is:

Index value = Σ(Price of stock i / Sum of prices of all stocks in the index)

where:

• Σ is the sum of
• Price of stock i is the price of stock i
• Sum of prices of all stocks in the index is the sum of the prices of all stocks in the index

For example, let’s say that a price-weighted index contains three stocks.

• Stock A has a price of $100
• Stock B has a price of $50
• Stock C has a price of $25
• Sum of all stocks of $225

The value of the index would be:

Index value = (100 + 50 + 25) / 225 = 18.75

As you can see, the stock with the highest price (Stock A) has the largest weight in the index. This means that a change in the price of Stock A will have a greater impact on the value of the index than a change in the price of Stock C.

Advantages of price-weighted indexes

• Price-weighted indexes are easy to calculate and understand.
• They are a good way to track the performance of the stocks with the highest prices.

Disadvantages of price-weighted indexes

• They can be volatile, as the value of the index can be easily affected by changes in the prices of a few stocks.
• They do not give equal weight to all stocks in the index, which can lead to distortions in the index’s performance.

Not all indices are tradable in India. Only a few indices, such as the Nifty 50, Bank Nifty, and Sensex, are tradable in the form of futures and options. This means that you cannot directly buy or sell the Nifty 50 index. Instead, you can trade Nifty 50 futures or Nifty 50 options.

Futures contracts are a type of derivative that gives you the right to buy or sell an underlying asset at a predetermined price on a predetermined date. Options contracts are a type of derivative that gives you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on a predetermined date.

In India, futures and options contracts on indices expire on a monthly basis. This means that all futures and options contracts that are not closed by the expiry date will expire on that day. The prices of futures and options contracts will converge to the underlying index price on the expiry day.

Options contracts also expire on a weekly basis. This means that there are weekly options contracts that expire every week. Weekly options contracts are a good way to hedge your portfolio or speculate on the short-term direction of the market.

Here is a table summarizing the tradable indices in India, their expiry dates, and the type of derivative contracts that are available: