Stock market indexes: types and significance

We trade in stocks on two markets, those two markets are NSE and BSE stand for National stock exchange and Bombay stock exchange respectively. A stock market has market indices, out of which SENSEX is the one. Through stock market indices like SENSEX, you can have a summary of the real-time movements of prices of the stocks. In a stock market index, different stocks of the same class or category are grouped. SENSEX word is made from the combination of two words, the first one is sensitive and the second one is an index and its full form is Stock Exchange Sensitive Index. This index provides us with the stock movements on the Bombay stock exchange. Whereas to reflect the movements of stocks on the national stock exchange NIFTY is used, NIFTY stands for national stock exchange fifty. There are various types of stock market indices. 

The points given below are the types of stock market indices: 

  • Benchmark index: This index provides us with the price movements of the whole market. With the help of this index, you can know the amount that you have earned on average funds and the amount that should have been earned. Examples of this index are BSE SENSEX and NSE NIFTY.
  • Broad market index: It is also a type of benchmark indices that tend to corroborate more stocks into one index. An example of this index is BSE 100. BSE SENSEX only provides the movements of the top 30 financially sound companies but on the other hand, if you want to know about the movements of the top 100 financially sound companies then you can make use of a broad market index I.e. BSE 100. 
  • Market capitalization index: Different indexes take different components into consideration to measure a company’s performance. Just like that in this type of market index, the total market value of the outstanding shares of the company is taken into account to measure the performance. Examples of this type of index are Small-cap, mid-cap, etc. 
  • Sectoral or industrial-based index: Another type of market index is a sectoral or industrial-based index. If you want to know about the performance of stocks in certain industries such as technology, IT, beverage, energy, healthcare, industrial goods, etc. For this purpose, the sectoral or industrial-based index can be used. An example of this type of index is the NIFTY FMCG index. 

These are the types of stock market indexes. Apart from this, we will also tell you about their significance. 

Significance of stock market indexes:

  • It helps you to pick the right stocks: There are a number of companies that are listed in the stock market. So many companies can create confusion in your mind about what company you should choose. But taking stock market indexes into consideration, you can pick the right shares for you. 
  • These indexes also provide you with the daily sentiments of the investors that cause fluctuations in the prices of stocks. 

These two are the points of significance of stock indexes. You can visit the 5paisa website for a more detailed understanding. 

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