The stock market is volatile because there is an interplay of internal and external economic factors that affect the market. This is why you observe many market patterns and trends at any given point.
If you are wondering how to get a snapshot of the market performance, you should consider monitoring stock market indices. These stock market indices are an excellent way to keep a check on the market and will ultimately help you make informed decisions!
Read this article further to learn about stock market indices and their types.
What Are Stock Market Indices?
Stock market indices are performance indicators that measure the overall market’s performance or even a specific market sector.
A stock market index comprises a selection of equity stocks that are chosen based on predetermined parameters.
These indices can also be built based on variables such as their market capitalisation and industry sector. Once an index is built, it tracks the price movements of the stocks, and if the prices of these stocks rise, the index will also rise as a whole.
Types of Stock Market Indices
With this basic introduction to stock market indices, it is time to look at a few stock market indices that are most popularly used in the Indian markets.
1. Market Capitalisation Index
The market capitalisation index is formed based on the market cap of the companies listed on the stock exchange. For example, Nifty Next 50 is a large-cap stock market index. This index is especially useful for investors who invest in companies based on their market size.
2. Benchmark Index
The benchmark index is generally the go-to index for investors who want to check out the market performance in general. There are two leading benchmark indices, Nifty 50 and Sensex, which comprise the top 50 NSE stocks and top 30 BSE stocks, respectively.
Benchmark indices are known to employ the most rigorous standards while selecting the companies and hence are regarded as the most reliable performance indicators of the stock markets.
3. Sectoral Index
If you want to measure the performance of a specific industry or a sector, sectoral indices should be your go-to indices. For instance, the Nifty Energy Index consists of 10 companies that are traded on the NSE, including petroleum, gas, and power.
A few other sectoral indices include S&P BSE Healthcare, Nifty Auto Index and Nifty Financial Services.
Conclusion
In a nutshell, the stock market indices play a key role in helping investors understand the market performance. By understanding how these different indices work and their compositions, you can ensure that you make sound financial decisions that will help you achieve your financial goals.
However, remember that these indices alone are not enough to determine whether you should invest in a particular stock or not. Always ensure that you perform other analyses before picking the stocks that meet your goals!
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