While discussing markets and exchanges, we’ve come across the word Nifty. But what is Nifty? Nifty or NIFTY 50 is an Indian Stock market index.

Generally, an index is a list of words or phrases in reading materials that point a reader to the relevant material they seek. A financial index is a statistical measure that measures the performance of a particular sector or market.

The BSE has over 5,000 companies listed on it and many of these are traded daily in unimaginable volumes. It has been observed that some stocks decline well over 20% in a single day while some rise over 20% on the same day. 

Does this mean the market nets out with no movement? 

No! We as investors simply won’t be able to analyze the market’s overall performance in a single day like this.

Thus, an index allows us to effectively monitor the movement of the market as a whole, making it easy for investors to view the existing market conditions. Moreover, these indices also help investors analyze the past movement of the market and help make well-informed decisions. Furthermore, an individual can invest in ‘index funds’ which generate good returns and require little financing.

However, there are certain flaws in these indices. Some indices are price-weighted i.e. they are computed by calculating the prices of relevant stocks. Such an index ignores the market capitalization of stock and is greatly influenced by the price of costlier stocks. 

On the other hand, some indices are weighted by market cap. This type of index will be affected more by larger companies and not give enough exposure to smaller companies which generally provide more returns.

Generally, our indices provide an accurate view of the stock market based on which we normally conclude whether the market is ‘Up’ or ‘Down’. India has two major indices:-

  • NIFTY 50= This index, by the NSE, is the most popular Indian index today. It is a diverse stock index containing the top-listed 50 blue chip stocks from 13 different sectors of the economy. The NIFTY 50 Index represents about 62% of the free float market capitalization of the stocks listed on the NSE and the total traded value of NIFTY 50 index constituents is approximately 41% of the traded value of all stocks on the NSE.
  • SENSEX= BSE’s SENSEX is the oldest index of India. It is a basket of the 30 most financially sound and capable companies listed on the BSE. The word ‘SENSEX’ is a combination of the words ‘Sensitive’ and ‘Index’ which was coined by Stock Market expert Deepak Mohini. This index trades using free-float capitalization, which means that it counts shares that can be freely traded as opposed to shares that are locked in or held by insiders.

However, indices are not an Indian idea. There are several indices all around the world with at least one per economy which helps investors monitor the equity market of that country. For example:-

  • Global DOW, DOW Jones, S&P 500 (USA).
  • S&P/TSX (Canada)
  • DAX (Germany)
  • CAC 40 (France)
  • MOEX (Russia)
  • Hang Seng (Hong Kong)
  • Nikkei 225 (Japan)
  • KOSPI (Republic of Korea)
  • Karachi 100/KSE (Pakistan) 

But are indices listed only to major stocks or stocks?

No. As stated earlier, indices are a measure to gauge the performance of a particular sector or market. Now, said market COULD be regarding commodities as well. Moreover, indices can be sector-specific as well. 

Sectoral indices are used to monitor the movement of stocks belonging to a particular sector. These indices are necessary to see the impact of certain events on all stocks of a particular sector. For example, the Nifty IT index tanked in 2022 since IT stocks witnessed heavy selling pressures due to adverse sentiments in the US Markets. Some of the major sectoral indices are:-

  • NIFTY Bank
  • NIFTY Auto
  • NIFTY FMCG
  • NIFTY IT
  • S&P BSE Capital Goods
  • S&P BSE Consumer Durables
  • S&P BSE Infra
  • S&P BSE Oil and Gas

Similar to a stock index, a commodity index tracks the prices and returns on a group of commodities. These can either track a range of commodities such as energy, agro products, and metals or track particular products like Bullion. Some commonly known commodity indices are:-

  • MCX iCOMDEX Base Metal Index
  • MCX iCOMDEX Energy Index
  • MCX iCOMDEX Bullion Index
  • NCDEX Guarex

An individual can make money solely by investing in indices as well. One can generate substantial returns with minimal margins by entering into derivatives contracts of these indices or investing in ‘index funds’. Derivatives are complicated tools meant for people with significant knowledge of the matter. However, an index fund is a passively traded fund that invests in all the stocks of the relevant index in a similar composition. 

For example, if you invest in a SENSEX index fund, the money given in the fund will be utilized to invest in all 30 stocks that compose SENSEX in an identical composition. Here, you would earn returns similar to the returns provided by the index. These funds are generally for individuals who desire predictable returns and have lower-risk appetites.