For many investors, monitoring the movement of every individual stock is impractical. As a solution, stock market indices were introduced to represent a basket of selected stocks, offering a snapshot of the market's general direction.
A stock market index, or simply "index", reflects the aggregate value of a specific group of stocks. Any daily price fluctuations in these stocks consequently alter the index's value, representing the broader market's shifts.
In India, the most prominent indices are the S&P BSE SENSEX, which comprises 30 stocks, and the NSE Nifty50, containing 50 stocks. Several other Nifty indices such as Nifty Bank, Nifty Midcap50, Nifty Mid100, Nifty Infra, Nifty IT, and Nifty Realty also exist, each focusing on specific market segments.
For instance, imagine you're a teacher wanting to gauge the performance of your entire class in a recent exam. While you could look at every student's score, it would be time-consuming. Instead, you select five students with varied performance levels – a top scorer, someone from the upper middle, one from the middle, someone from the lower middle, and the lowest scorer. By averaging their scores, you get a rough idea of the class's overall performance.
Similarly, a stock market index like the S&P BSE SENSEX or NSE Nifty50 functions in the same way. Instead of considering every stock in the market, they focus on a select group, representative of the market's overall health. The rise or fall in this "sample" gives investors an idea about the broader market trend.