BSE Stock Market Indices: Meaning and Importance

Most of us in our daily lives come across statistics like “60% of working women don’t have a house help” or “50% of teenagers believe that exercise reduces the risk of heart disease”. It is important to know that these are not absolute facts. They are not indicators of the sentiments of every individual of an age group or demographic, instead, these figures provide a broad understanding based on a small sample size. This technique is called sampling, and it can help you get valuable insight about many sectors like finance, society, economy, etc.

The stock market also uses the sampling method to give investors a fair idea of the sentiment of the market. This is done by creating stock market indices. These indicators help you in gauging and predicting the future behaviour of the stock market. If you are a first-time investor in the stock market and pondering how to begin, we have got you covered.

Let’s start with what share market indices are and what are the main BSE Indices. Have a glance!

What is a Stock Market Index?

In the technical sense, a stock market index can be defined as a statistical measure that indicates the changes in the share market. The indices can be used to gauge the sentiment of the market as a whole or just a particular segment of the market. 

The stock market indices are created by grouping together stocks of companies in the same sector or sets of stocks that fulfill the same criteria. The shares used to create indices are already listed and exchanged on the stock market. The share market indices are generated on the basis of a variety of selection criteria such as total market capitalization, segment, or industry.
Each share market index reflects the change in the price of the stocks that constitute them. This means that the changes in any share market index are directly in relation to the performance of the stocks that constitute it. In a nutshell, if a stock market index goes up, it means that the underlying stocks also increase in value. If the value of the shares goes down, the index also goes down.

Importance of Stock Market Indices

Now that you know the answer to ‘what is a stock market index?’ Let’s take a look at why these indices are required. In simple terms, the performance of a share market index can be an accurate indicator of the state of the market. Investors can get the necessary information from these stock market indices and devise investing strategies accordingly. Let’s take a look at some of the other reasons why these stock market indices are important.

 They Provide Information for Benchmarking

There are many investors that use the performance of stock market indices as a benchmark for determining the performance of their investment. A particular index can be used over a given period of time for the comparison of the securities in your investment portfolios. This way, an investor can get a more accurate understanding of the performance of your investments. 

Minimizing Risks

Actively investing in stock market indices through index funds can be one way to outperform the market. Since indices have stocks from various different sectors and industries, it helps in creating a diverse portfolio while mitigating the risk of underperforming. When you invest in one particular stock, it can really harm your corpus, particularly when the value of that stock goes down. So, if you wish to reduce your risk, it is better to invest in stock market indices. 

Helps in Passive Investing

There is a great deal of research that must be done before investing in a stock. This proves to be quite difficult for passive investors since they look for ways to invest in the long term without actively monitoring their portfolios. This is why creating a stock market index portfolio can help you reduce the costs involved with stock picking and research. This way you won’t even need to settle on the quality of the stocks.

How are Stock Market Indices Selected?

So far, we’ve talked about how stock market indices are created by grouping the best stocks of a particular industry or sector. Now let’s take a look at how the stock market indices in India are selected.

Market Capitalization

When market capitalization is the basis for the creation of an index, the companies with the highest market capitalization are picked and grouped together. Stocks with higher market capitalization have a greater weightage on the value of the index. Stocks with relatively lesser market capitalization do not have a great effect on the index. In the Indian stock market, weight is assigned to the stocks in accordance with the free-float market capitalization method. Read To Know More :

Price

Higher priced stocks have a greater impact and weightage on the index. While lower-priced stocks have a lesser weightage in the stock market index. 

What are the BSE Indices?

The following are the BSE indices in the Indian stock market:

• BSE SENSEX
• S&P BSE SmallCap
• S&P BSE LargeCap
• S&P BSE AllCap
• S&P BSE MidCap

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