People often ask the question – How is the market doing? This interest in the broad market movement stems from the general observation that prices of most of the stocks tend to move together, a fact that has fairly strong empirical underpinning. The general movement of the market is typically measured by indices representing the entire market or important segments thereof. Most of the stock market indices used in practice are of three types.
Price–weighted Index: An index reflecting the sum of the prices of the sample shares in a certain year (or month or week or day) with reference to a base year. The price - weighted index assumes that the investor buys one share of each stock included in the index.
Equal–weighted Index: An index reflecting the simple arithmetic average of the price relatives of the sample shares in a certain year (or month or week or day) with reference to a base year. An equal – weighted index assumes that the investor invests an equal amount of money in each stock included in the index.
Value–weighted Index: An index reflecting the aggregate market capitalization of the sample shares in a certain year (or month or week or day) in relation to a base year. A value – weighted index assumes that the investor allocates money across various stocks included in the index in such a way that the weights assigned to various stocks are proportional to their market capitalization.
A number of stock market indices are constructed in India: RBI Share Price Index, BSE National Index, CMIE Index, CRISIL Index, BSE 200 Index, SENSEX, S&P CNX Nifty Index, etc. The more popular ones are described below.
Bombay Stock Exchange Sensitive Index – Perhaps the most widely followed stock market index in India, the Bombay Stock Exchange Sensitive Index, popularly called the Sensex, reflects the movement of 30 sensitive shares from specified and non-specified groups. The index for any trading day reflects the aggregate market value of the sample of 30 shares on that day in relation to the average aggregate market value of these shares in the base year 1978-79. This means that this is a value-weighted index.
S&P CNX Nifty – Arguably the most rigorously constructed stock market index in India, the Nifty index reflects the price movement of 50 stocks selected on the basis of market cap and liquidity (impact cost). The base period selected for Nifty is the close of price on November 3, 1995, which marked the completion of one year of operation of NSE’s Capital Market Segment. The base value of the segment has been set at 1000. It is a value–weighted index.
The Economic Times Index of Ordinary Share Prices – On trading days, the Economic Times publishes the all-India index of ordinary share prices. The base year for this index is the financial year 1984-85, the sample used for this index consists of 72 actively traded shares, and the average employed in the construction of this index is a simple arithmetic average of price relatives. This means that this is an equal-weighted index.
The Financial Express Equity Index – Published by the Financial Express, this index has the calendar year 1979 as the base year, is based on 100 actively traded shares and employs a weighted arithmetic average of the price relatives of the share in the sample. This means that this is a value-weighted index.
Bombay Stock Exchange National Index – A broad-based index in comparison to the Sensex, the Bombay Stock Exchange National Index reflects the price movement of 100 actively traded shares drawn from specified and non-specified groups of the five major stock exchanges, namely Bombay, Calcutta, Delhi, Ahemdabad and Madras. The base year for this index is 1983 and it is calculated in a way identical to that of the Sensex. This too is a value-weighted index.
