The National Stock Exchange (NSE) is home to thousands of different firms, so naturally, it would be impossible to check up on each individual performance if you wanted to get a feel for the market. Rather, it would be more practical to look at the broader market attitude and industry trends in question. As used above, “sector” refers to a part of the economy where companies in the sector have similar or related business activities (activity, product or service).
What Are Stock Market Index/Indices?
The best way to comprehend a stock market index is to first grasp what a stock exchange is. The stock exchange is where all tradable securities, such as shares, bonds, derivatives, and commodities, are listed.
To be able to trade (buy and sell) these assets, they must first be listed on stock exchanges, which is overseen by the Securities and Exchange Board of India (Sebi), our market regulator.
In India, there are two major stock exchanges:
- Bombay Stock Exchange
- National Stock Exchange
Other exchanges besides these two are the Calcutta Stock Exchange, Metropolitan Stock Exchange, and National Commodity & Derivatives Exchange Ltd. Sebi recognises 9 stock exchanges in the nation.
In India, a stock market index is an indication of a particular stock exchange. Hundreds and thousands of firms are listed on both markets, yet indices only reflect a handful of the best performers.
This is done to remove clutter and to show the genuine market position. Bigger and better enterprises lead the economy and the country’s financial health, which is why the indexes only include the cream of the crop.
What Do You Mean By Sectoral Indices?
While the NSE monitors whether clearing members and listed businesses follow the norms and regulations established by SEBI and the exchange. These indexes and index-related services are provided by NSE Indices Limited, a subsidiary of the NSE. The business is in charge of the NSE’s NIFTY indexes. Broad-based indices, theme indices, sectoral indices, customised indices, and strategy indices comprise it.
Sectoral indices reflect individual industries and provide market benchmarking data for those industries. Energy, healthcare, automobiles, consumer products, technology and communications, and finance are some of the industries chosen for sectoral indexes. To illustrate, Bank NIFTY in the NSE’s sectoral index illustrates the total performance of the Indian banking industry. Sectoral indexes are assessed twice a year, in January and July.
Index such as the NSE Pharma is regarded as good indicators of developments in the pharmaceutical sector.
Another notable example is the Nifty PSU Bank Index, which is an index of all listed public sector banks.
Types Of NSE Sectoral Indices
The NSE share market is divided into 15 primary sectors, as shown in the table below:
|Sectoral Index||Industry/Sector||No. Of Constituents||Description|
|NIFTY Auto||Automobile||15||Manufacturers of automobiles, motorbikes, heavy vehicles, tyres, and auto ancillaries|
|NIFTY Bank||Liquid and Large Banks of India||12||Ascertains the benchmark that helps investors and market intermediaries review the capital market performance of the banks in India|
|NIFTY Financial Services||Financial Industries||20||Banks, financial institutions, housing finance, insurance companies, and other financial service providers|
|NIFTY Financial Services 25/50||Financial Industries (stocks that form a part of NIFTY Financial Services will be a part of this index at all times)||20||Individual stock weight should not exceed 25%.
The average weight of all stocks with a 5% individual weight should not exceed 50%.
|Nifty Financial Services Ex Bank Index||Financial Services sector other than Banks||30||Stocks in the Nifty 500 Index
Other than banks, stocks in the Financial Services industry
|NIFTY FMCG||Fast Moving Consumer Goods||15||Non-durable, widely used, and readily available goods|
|NIFTY Healthcare||Healthcare Companies||20||Stocks should be included in the Healthcare sector,|
|NIFTY IT||Indian IT companies||10||IT infrastructure, IT education, software training, networking infrastructure, software development, hardware, and IT support and maintenance must be the focus of businesses.|
|NIFTY Media||Media & Entertainment||10||It encompasses the media, entertainment, printing, and publishing industries.|
|NIFTY Metal||Metal Sector||15||Metal and mining industries are included|
|NIFTY Pharma||Pharmaceutical Sector||20||Companies engaged in pharmaceutical production|
|NIFTY Private Bank||Private Sector Banks||10||90% or more of the bank’s trading activity during the previous six months is required|
|NIFTY PSU Bank||Public Sector Banks||12||Banks that are traded (listed and traded as well as not listed but authorised to trade) on the NSE are eligible for inclusion in the index if the selection criteria are met.|
|NIFTY Realty||Real Estate Companies||10||Primarily involved in the development of both residential and commercial properties|
|NIFTY Consumer Durables||Consumer Durables Industry||15||Home furnishings, consumer electronics, housewares, and other similar goods manufacturers|
|NIFTY Oil and Gas||Oil, Gas and Petroleum Industry||15||All firms involved in the production and extraction of oil, gas, and petrol|
|Nifty MidSmall Financial Services||Financial Services Sector||30||Stocks that are or will be part of the Nifty MidSmallcap 400 Index
The performance of midcap and small cap stocks in the financial services industry is tracked.
|Nifty MidSmall Healthcare||Healthcare Sector||30||Stocks that are or will be part of the Nifty MidSmallcap 400 Index
The performance of midcap and small cap stocks in the healthcare industry is tracked.
|Nifty MidSmall IT & Telecom||Information Technology & Telecommunication||20||Stocks that are or will be part of the Nifty MidSmallcap 400 Index
The performance of midcap and small cap stocks in the information technology and telecommunications industry is tracked.
(The number of elements in each sector is as of November 22, 2022)
Eligibility Criteria For The Sectoral Indices
The following firms are eligible to be considered for inclusion in NIFTY sectoral indices:
- Companies should be NIFTY 500 members at the time of evaluation.
- The index should include at least ten stocks.
- If the number of eligible stocks from the NIFTY 500 falls below 10, the remaining stocks will be drawn from the universe of stocks rated inside the top 800. This decision will be made based on the average daily turnover and average daily full market capitalization of the preceding six months’ data, which was utilised for index rebalancing of the NIFTY 500.
- The firms will be chosen based on their free-float market capitalisation after being arranged in descending order.
How Do Indices Select Stocks?
By now, we must have realised that indices are ways and means of grouping the finest of the stocks since they have the most influence on the economy and are the best gauge to comprehend the markets in general. However, we must also understand how an Indian stock market index chooses stocks.
How indexes calculate their values: When a whole index, such as the Sensex or the Nifty, rises or falls, it indicates that the equities that comprise those indices have fared better or worse. This does not imply that if a company, such as Adani Power Ltd., which is listed on both the Nifty and the Sensex, rises by 8% during a trading session, the index will not rise by the same amount because other stocks in the index may have risen or fallen and influenced the index’s movement. On any given day, not every sector of the economy is performing well. The entire value of an index cannot be calculated by simply adding all m-cap values since not all stocks have the same weightage in the index. The weights will be assigned in accordance with the stock selection strategy in place.
Stocks are chosen mostly based on two factors:
a) Market Capitalization: When the M-cap is the foundation of the stock selection technique, the companies with the biggest market capitalization are chosen and placed together in an index. Companies with the biggest m-cap have a greater effect on the index’s value, whilst businesses with a lower m-cap have less influence. For the most part, Indian indexes employ free-float market capitalisation to allocate weights to their companies.
What distinguishes free float m-cap from complete m-cap: M-cap is the overall worth of the firm as determined by the number of outstanding shares. The indexes employ free float m-cap to weight stocks, which eliminates shares held by promoters.
Reliance Industries Ltd. (RIL), for example, has the greatest free float m-cap as of November 22 closing data, hence it has the highest weightage among the other companies that comprise the Sensex. As a result, a positive or negative movement in RIL will have a greater impact than a good or negative movement in other equities.
b) Price: Some indices throughout the world utilise price to provide weightage to stocks in an index. Japan’s Nikkei 225 is an example of this. Companies with higher stock prices have a bigger weightage and have a greater influence on the index than lesser priced ones.
How Can You As A Retail Investor Trade In Sectoral Indices?
This segmentation of markets into distinct sectors allows investors to conduct a comprehensive examination of the economy and comprehend how the economy and a certain sector are functioning. Aside from that, it aids in the establishment of benchmarking data for certain sectors or industries.
Why Do We Require Indices?
The main idea behind indices is to make trading easier for investors. Consider a stock market with no such classifications; it is just an open marketplace where all stocks listed on exchanges are accessible for purchase; you have no idea which stocks have a greater m-cap, which stocks have lesser value, and which are the ‘better’ stocks. Every investor will be wandering around like a headless hunter. This is when the significance of stock market indexes becomes clear. They make it easier for you to trade by grouping them and increasing their visibility.
Here are a few reasons why indexes are an important component of stock market investments:
Grouping/Sorting: As previously said, having all of the stocks organised and picked by a certain strategy, such as free float m-cap, makes it easy to view the best of the stocks in one location. Consider the Sensex as an example. S&P BSE The Sensex is made up of 30 equities, the S&P BSE 100 is made up of 100 stocks, and the S&P BSE 500 is made up of 500 stocks. These indexes allow you to see the top m-cap stocks in one spot.
Sometimes you just want to see how a particular industry is performing. For example, if a pandemic has grabbed the entire world and stock markets are down, you may be interested in how the health industry is faring. In the absence of indexes, you would have to search for all pharmaceutical businesses individually, compile them, and do your own calculations. However, bundled indexes such as Nifty Pharma and S&P BSE Healthcare take care of things for you.
Assessing stock and market performance: Sorting not only assists you in selecting stocks but also helps you through the process. Having ordered indices makes it easier to discover solutions to questions. If a stock is performing better than the benchmark stock market index, if a certain stock is riskier than others, if it is performing better or worse than the others listed beside it in the index, if the stock has done better or worse than others in its industry, and many more questions. Indices are a terrific method to keep track of how each stock performs individually and in comparison.
Indices include a wealth of information about equities. Price history, volume variations, peer-to-peer comparison, sector performance, volatility, and a sense of where the market is heading are all useful indicators. If a group of the 30 or 50 top firms is trending up or down, it says a lot about how the stock market is performing in general.
What Are The Various Types Of Stock Market Indices?
- Benchmark Indices
The Nifty 50 index, which consists of the top 50 best-performing equities, and the BSE Sensex index, which consists of the top 30 best-performing companies, are indicators of the National Stock Exchange and the Bombay Stock Exchange, respectively.
This group of equities is known as a benchmark index since they employ the best standards to govern the firms they select.
As a result, they are regarded as the most reliable source of information about how markets work in general.
- Sectoral Indices
Both the BSE and the NSE have several strong indicators that gauge firms in a specific sector.
Indices such as the S&P BSE Healthcare and NSE Pharma are regarded as good indicators of developments in the pharmaceutical sector.
Another notable example is S&P BSE PSU and Nifty PSU. Bank Indices are indexes that track all publicly traded public sector banks.
However, neither exchange is required to have equivalent indexes for all sectors, yet this is a key reason in general.
- Market-Cap Based Indices
Few indexes choose firms on the basis of their market capitalization. Market capitalization refers to the stock exchange market value of any publicly listed corporation.
Indices such as the S&P BSE and NSE small cap 50 are comprised of firms with a smaller market capitalization as defined by the Securities Exchange Board of India (SEBI).
- Other Indicators
Several additional indexes, such as the S&P BSE 500, NSE 100, and S&P BSE 100, are significantly bigger and have a greater number of stocks listed on them.
You may have a low risk appetite, but Sensex stocks may have a high risk appetite. Investment portfolios are not designed to fulfil all demands. As a result, investors must remain focused and invest in areas where they feel secure.
What Are Stock Market Indices?
A stock market index, often known as a stock index, is an indicator that displays all key movements in the Indian stock market. To create an index, the same equities are chosen from among those already grouped and listed on the stock exchange. However, the selection criteria are based on the industry, the size of the firm, and its market capitalization.
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