Stock Market Indices

Chapter Objectives

To understand the concept of stock market indices To learn the types of stock index To know the basis for CNX NIFTY JUNIOR and other indices

Concept of Stock Market Indices

Stock market indices help to measure the stock price movement. Sensex, Nifty and Nifty Jr. are some of the stock market indices. The following are the advantages of stock market indices:

They are used by the technical analysts to predict the future trend of market. They help to find out the broad trends in the market. They act as a status report on the general economy.

Types of Stock Index

There are two types of stock index, which are as follows:

Price index: It gives an idea about the general price movement of the constituents that reflects the entire market. Wealth index: It gives an idea about the real wealth created for shareholders over a period of time.

Differences between the Indices

Following are the factors that differentiate one index from the other:

Number of the component stocks Composition of the stocks Weight of the stocks Choice of the base year

BSE Sensitive Index

It is an index that consists of thirty stocks, which are actively traded. The thirty stocks represent the different sectors such as services, telecom, consumer goods, etc. The criteria for selecting these thirty stocks are:

Qualitative criteria:

Quantitative criteria:
Market capitalization Liquidity

Industry representation Track record

NSE Nifty Index

It is an index that is established by India Index Services Product Limited (IISL) and Credit Rating Information Services of India Limited (CRISIL). It is also known as S&P CNX Nifty because it has a strategic alliance with Standard Poor Rating Services. The objectives of NSE-50 Index are as follows:

To provide a tool for managers to measure market return. To reflect the price movement of the market.

Selection Criteria
The selection criteria of Nifty index are:

Market capitalisation: The index include only those stocks of companies that have a significant market capitalisation of Rs. 5 billion. Liquidity: The liquidity is calculated with the impact cost criterion, which determines the cost incurred in trading an index.

CNX Nifty Junior

It consists of 50 stocks of the company.

Companies having a market capitalisation of Rs. 2 billion are included in this index.
The liquidity criteria for this index is same as S&P CNX Nifty.

S&P CNX 500

It is an index that consists of 500 stocks of the company. The stocks of the company that are going to be traded are selected on the basis of various factors like, market capitalisation, trading interest and financial performance. It provides a basis for comparing the portfolio returns with the market return.

Chapter Summary
By now, you should have:

Understood the concept of stock market indices Learnt about various types of indices