InvestorQ : What are stock market indices and how are indexes calculated?
Anamika Sodhani made post

What are stock market indices and how are indexes calculated?

sarah Leo answered.
3 years ago

An index, as the name suggests, is a measure to get an idea of the market movement. To get a clear picture of how the Indian market is moving, you can create an index of the most important and large stocks that are traded, give a weightage to each stock according to their market importance and then you have the index. You have general market indices like the Nifty and the Sensex. You also have thematic indices like Mid-Cap index and Consumption Index or Commodities Index. Additionally, you also have sectoral indices like Auto Index, Banking Index, Oil & Gas Index, FMCG Index, IT Index etc.

Index returns are typically calculated based on the CAGR approach over a period of time. Both the Sensex and the Nifty have yielded between 16-18% CAGR returns since their inception, excluding the impact of dividends paid out. That makes a strong case for investing in equities as an asset class for creating wealth in the long term.

Can you explain what sector specific indices are

Both the NSE and the BSE have sector indices that cater to specific sectoral themes. In fact, they also offer Futures trading on such indices. In fact, the Bank Nifty on the NSE is one of the actively traded sectoral indices on the exchange on a daily basis.

The illustration above captures some of the key sectoral indices on the NSE. The Bank Nifty remains the most popular index in terms of trading volumes. Similarly the BSE also has many sectoral indices. The most active index in terms of turnover on the BSE is the BSE Finance Index, followed by the BSE Bankex.