You cannot do without a stock market index, simply because you cannot capture the mood of the market.
In short the indices in the country, help you to know if the mood is up or down or there is no change in investor sentiments at all.
Popular stock indices in India
Two of the most popular stock indices in the country are the Sensex, which reflects the overall sentiments on the Bombay Stock Exchange and the Second is Nifty, which reflects the sentiments and mood of the NSE.
The Sensex and the Nifty largely comprise blue-chip companies, which are high in market capitalization.
Apart from the Sensex and the Nifty, there are the midcap indices, which largely comprise of companies that have smaller market capitalization than the large cap indices - the Sensex and the Nifty.
Both the NSE and the BSE have midcap-indices that are dedicated to and have listed mid sized companies.
It is important to point-out that companies which today are mid caps, could easily be large caps and could be listed on the Sensex and the Nifty. Also, stocks that have lost their sheen could be moved away from the Sensex and the Nifty into the mid cap index.
There are also other factors like popularity of a stock, shareholding and liquidity that will determine where it will be placed.
For example, Adani Ports was never a part of the Nifty and today forms a part of the Nifty. Similarly, it could mean that other companies move into the midcap.
After this we have the very small cap companies. These are relatively smaller capitalized companies. They form a part of the small cap index. It is important to point-out that the Sensex and the Nifty move in tandem. For example, if one index gains about 1 per cent, the other would more or less gain the same. Since most of the companies listed are common the variance is minimal.
How is the movement of the indices like Sensex and Nifty determined?
Each company has a weightage in the Sensex and the Nifty. Let us give a classic example. Today, ITC has the highest weightage in the Nifty. If ITC falls heavily and many other stocks climb, it could still pull the indices lower, given that ITC has a very high weighatge in the Sensex.
In fact, Reliance Industries and ITC, both command a significant share of weight in both the indices.
Why is the Sensex and the Nifty important?
Most of the big institutions invest money in Sensex and Nifty companies. In fact, their portfolio is also benchmarked against these indices. These are two of the most popular indices in the country.
How can you know how the markets are moving without an index like the Sensex and the Nifty. But as mentioned earlier what is in today, need not be in the Sensex and the Nifty tomorrow.