Understanding How the Indian Stock Market Is Measured
Market indices act as benchmarks that represent the overall performance of the stock market or a specific segment of it.
They help investors understand market direction, sentiment, and relative performance.
This section explains what stock market indices are, how they work in India, and why they matter.
What Is a Stock Market Index?
A stock market index:
- Represents a group of selected stocks
- Reflects the performance of a market or sector
- Is calculated using a predefined method
Indices do not represent ownership — they are measurement tools.
Why Indices Are Important
Indices help investors:
- Track overall market performance
- Compare investment returns
- Understand market trends
- Create passive investment products
Most market discussions are based on index movement.
How Indices Work in India
In India:
- Indices are created and maintained by exchanges
- NSE manages NIFTY indices
- BSE manages SENSEX and BSE indices
Index values change based on:
- Price movement of constituent stocks
- Weight assigned to each stock
Types of Market Indices in India
📌 Broad Market Indices
- Represent the overall market
- Include large, well-established companies
Examples:
- NIFTY 50
- SENSEX
📌 Sectoral Indices
- Track specific sectors like Banking or IT
Examples:
- NIFTY Bank
- NIFTY IT
📌 Market Capitalization Indices
- Based on company size
Examples:
- NIFTY Midcap
- NIFTY Smallcap
📌 Thematic Indices
- Based on themes or strategies
Examples:
- NIFTY ESG
- NIFTY Dividend
How Stocks Are Selected for an Index
Index inclusion is based on:
- Market capitalization
- Liquidity
- Free-float shares
- Sector representation
Stocks are reviewed periodically and can be added or removed.
How Indices Are Used by Investors
Investors use indices to:
- Measure portfolio performance
- Decide asset allocation
- Invest via index funds and ETFs
- Analyze market trends
Index Investing (Quick Overview)
Instead of selecting individual stocks, investors can:
- Invest in index mutual funds
- Invest in index ETFs
This provides:
- Diversification
- Low cost
- Market-linked returns
Common Beginner Misconceptions
❌ Indices can be bought directly
❌ Index rising means all stocks are rising
❌ Indices guarantee returns
Key Takeaways
- Indices measure market performance
- They are not tradable assets
- Used as benchmarks and investment tools
- Essential for market understanding
What Should You Read Next?
Start with the most important Indian indices:
NIFTY 50
SENSEX