Stock Market Index

The Stock Market Index is a data representation of company stocks grouped and assigned positions based on a metric known as “points”. In other words, they are relative measurements of stocks of various scrips listed on a given exchange.

By applying certain formulas, stock market index calculation is carried out, that’s where the “points” of indexes come from. In India, we have two prominent indexes, one is the Sensex and the other is NIFTY. But they aren’t the only ones.

Let’s find out what all types of Indexes are in the Indian Stock Market, what do they mean and how are they calculated. And this will in the long run help one understand how stock market works?

Types Of Stock Market Index

As mentioned earlier, there is primarily two stock market index that every trader ought to be aware of. Although, in addition to Sensex and NIFTY, there’s another one worth understanding, that is the Bank NIFTY. Now how are these related yet different, let’s find out?

Sensex

The term Sensex is just an acronym for Sensitive Index. Sensex comprises 30 scrips or company stocks, all listed on the Bombay Stock Exchange (BSE). To put it simply, Sensex is an indicator of whether the overall market will go up or down.

These 30 stocks are selected after calculations, in which one significant factor is the markets capitalization of those stocks. However, post-2003, BSE decided to add the factor of free-float market capitalization for index calculation.

Sensex is the oldest stock market index in India and is jointly managed by Standard & Poor’s (S&P) and BSE. At an advanced observational level, Sensex is also the indicator of how the economy of India is performing at large hence also a Bellwether Index.

The Sensex Index is updated twice in a given financial year. And notably, it has seen a rise from just 5000 points at the beginning of this century to over 57000 points in 2021.

NIFTY

The 50 largest companies of the Indian stock market are listed on the NIFTY 50 index. The term “NIFTY” is just an abbreviation for “National Stock Exchange Fifty”. Although, currently there are 51 stocks on the NIFTY 50 index.

Quite similar to how all 30 stocks in the Sensex index are listed on BSE, in the case of NIFTY 50, all the stocks are listed on NSE. NIFTY is completely solely managed by NSE Indices corporation.

NIFTY 50 was launched 10 years after the launch of Sensex in 1986.

Like Sensex, NIFTY too is structured around the concept of free-float market capitalization. However, till 2009 NIFTY conceptualization was based on only Market Capitalisation.

In this compilation of 51 stocks, several business sectors get covered such as Automobiles, Banking, Energy, IT etc.

Now before we dive into stock market index calculation, let’s look at another significant index that is in a way derived out of NIFTY itself.

NIFTY Bank Index

As discussed, the stock market index is a compilation of company stocks that are part of various sectors such as IT, Pharma, Financial Services etc. Out of these, it is essential to discuss in brief, the NIFTY Bank Index.

As the name suggests, Bank NIFTY comprises stocks that are the largest Banking Sector companies as listed on NSE. This particular stock market index represents the performance of the stocks of the Indian banking sector.

So all the important banks of India, such as HDFC Bank, ICICI Bank, State Bank OF India, form the Bank NIFTY. One important point to consider is that NSE has put up a condition, that at any given moment, only 12 stocks will be listed under the Bank NIFTY index.

BANK Nifty was launched in 2003 and the index calculation is carried out semi-annually.

How Stock Market Index Is Calculated

The index points aren’t some random numbers, on the contrary, they are calculated by following mathematical principles. So, before we go into the index calculation of Sensex and NIFTY, let’s understand some terms that come in handy in the calculation.

These are:

• Market Capitalization

The total worth of a given companies shares as listed on the exchange is defined as Market Capitalization.

• Free Float Market Capitalization

The “Free Float factor” is defined as the number of shares of a given company that are free to trade. Now, this factor multiplied with “Market capitalization” will give you “Free Float Market Cap”.

• Base Market Capitalisation

This refers to the market capitalization value for a pre-defined Base year. For example, in the case of Sensex, it is 1978-79.

As you will read further, you will understand how these terms are utilized on stock market index calculation.

How Sensex Is Calculated?

Whether it is Sensex or NIFTY, there is a formula for the calculation of every index.

The simple formula for Sensex Index calculation is:

Sensex Index Value = (Total Free Float Market Capitalization/ Base market capitalization) x Base index value

This formula will give the index value of a given stock, and by that one can conclude wherein the list of 30 companies can a particular stock be placed.

Now let’s see how the NIFTY index is calculated.

How NIFTY Is Calculated?

Now since NIFTY is an index of 50 companies, therefore, the calculation will be slightly different. The formula for NIFTY 50 is:

NIFTY Index Value = (Current Market Value/Base Market Capital) * 1000

The term Current Market Value is the same as the term Free-Float Market Capitalisation, as in the case of the Sensex calculation formula.

CONCLUSION:

Hopefully, after reading this, you no longer find the Stock Market Index as complicated as you thought it was before. This understanding will help all those beginner-level investors and traders who have no clue about how to pick stocks for long term.

But, remember all this knowledge is not to show-off but to utilise in your stock market journey and for that, you need to open a Choice Demat Account today.