What is an INDEX?

What is an INDEX?

An index is a number or numerical information that measures the performance of an entire country’s economy or a group of goods or financial instruments. It is a benchmark that reflects the economic situation and changes in a country, industry group, or region. It gives us an idea of the overall economic situation of the country and the ups and downs (i.e., bullish and bearish trends) in a specific industry sector.

Example of an index

Let’s say we are watching a cricket match. In a cricket match, each player on our country’s team contributes. Some players will score 10 runs, some 100, some 50, and some 20 runs. Now, when we talk about the team’s score, we don’t look at the performance of any one player. We look at the performance of all the players and their combined score, i.e., the total score of the Indian team.

How an index is calculated

Similarly, when we talk about an index that reflects the economic situation of a country, we do not look at any one sector or industry group. We talk about the score of all the industry groups in the country and add up all their scores. This gives us the index.

Types of INDEX

SECTORIAL INDEX

Sectoral indices depict the economic status of a specific sector. As we saw in the example above when we look at the total score of a team, we don’t see the performance of individual players; we see the performance of all players combined. Similarly, sectoral indices are similar to that.

This means that we look at the performance of batsmen and bowlers separately. The performance of the fielders is also considered. This means that we do not look at the performance of just one player, but the performance of the entire group based on their characteristics. Similarly, sectoral indices do not reflect the performance of any one industry but of all the industry groups associated with that industry.

Nifty Bank, Nifty Auto, Nifty IT and Nifty Pharma are some examples of sectoral indices. As Nifty Bank represents a group of banks which reflects the performance of the banking sector. Similarly, Nifty Auto, Nifty IT and Nifty Pharma reflect the position of their respective sectors. There are many other sectoral indices in the market, about which you can find out by searching on Google. In simple words, sector indices are used to understand the current situation of various sectors.

Nifty Bank, which is a well-known banking sector index, comprises a group of 10 banks. The banks involved are listed below, and the index reflects the performance of that group.

Sr. No.	Bank Name	Weightage
1.	HDFC Bank Ltd.	26.41
2.	ICICI Bank Ltd.	24.45
3.	State Bank of India	10.33
4.	Axis Bank Ltd	10.05
5.	Kotak Mahindra Bank Ltd.	9.96
6.	IndusInd Bank Ltd	6.47
7.	Bank of Baroda	2.94
8.	Punjab National Bank	2.17
9.	Federal Bank Ltd	2.11
10.	IDFC First Bank Ltd.	2.05

When shares are exchanged between people, it becomes necessary to have documentation and records to avoid fraud and maintain control over the transaction. People need to be confident that the exchange they are making is secure.

To address this need, an institution called the exchange house or exchange board was created. Today, we know it as the stock market or stock exchange.

BENCHMARK INDEX

In India, there are two main benchmark indices: BSE Sensex and NSE Nifty. Both Sensex and Nifty serve as benchmark indices, reflecting the performance of all sectors in the country. BSE (Sensex) and NSE (Nifty) indices depict changes in the entire industrial landscape of the country.

The term “Nifty” stands for National Fifty, which is composed of 50 leading stocks from different sectors linked to the National Stock Exchange (NSE). On the other hand, Sensex represents the Bombay Stock Exchange (BSE) and consists of 30 major stocks. This means that both the indices, Sensex and Nifty, provide insight into the country’s economy, indicating the overall economic condition of the entire market.

Major Index in India

Major indices in India

There are two main indices in India. You must have read their names in the news and newspapers many times. One of the major indices in the country is the Sensex and the other is the Nifty. Both these indices provide information about the overall economic condition of the country.

The Sensex

The Sensex is a stock market index that tracks the performance of 30 of the largest and most liquid companies listed on the Bombay Stock Exchange (BSE). The Sensex is calculated using a free-float market capitalization-weighted methodology, which means that the weight of each company in the index is proportional to its market capitalization and the number of its shares that are available for trading.

The Nifty

The Nifty is a stock market index that tracks the performance of 50 of the largest and most liquid companies listed on the National Stock Exchange (NSE). The Nifty is calculated using a free-float market capitalization-weighted methodology, which means that the weight of each company in the index is proportional to its market capitalization and the number of its shares that are available for trading.

FAQs

What is the market index in simple words?

An index is a tool that helps measure and track changes in a group of items or data points over time. It provides a way to understand the performance or trends of a specific area, such as stocks, prices, or economic indicators, by comparing them to a base value or reference point.

How is the index calculated?

An index is calculated by aggregating the market prices of selected stocks or assets based on predefined criteria, such as market capitalization or sector representation.