6. What is a stock market index? – Transcript

00:07Airline stocks on this day were mostly up. The airline sector was clearly up on this day because you can see these four stocks that make up the airline sector were higher than yesterday. Now, this was easy to do with just four stocks.

00:23But imagine if you had to figure out whether the entire stock market was up or down because BSE has some 5,000 stocks and National Stock Exchange has some 2,000 stocks. Obviously, going through all of those stocks is impossible to determine whether the general market is up or not. Hi, I'm Pratik Singh. In this video, we'll be talking about what an index is.

00:56So, looking at the top 50 companies, which is the Nifty index, or looking at the top 30 companies, which forms the BSE Sensex index, gives us an indication whether generally the market was up or not. Like in this example, you can see the Nifty constituents, that means the 50 companies that form the index, were mostly up. Hence, Nifty is up a few points on this day. And that's basically a way to know whether the market is

01:23generally up or not by simply looking at a single number, the index. A quick way to remember this is Nifty 50 because it rhymes. Nifty has 50 stocks and Sensex actually is short for sensitivity index, Sensex for short. So, you can check what the index is doing by going to nseindia.com and you can see what Nifty is doing on that day. And you can go to bseindia.com to check out what the Sensex index is on

01:50that particular day. You can also see all of this information on your trading terminal. You simply log in, add the indices, and you can see where they are. In fact, let me show what this looks like on Zerodha Kite. I will log in again.

02:06Now, there are two ways to actually do this. On the top left, I actually have Nifty and Sensex. So, I can see that Nifty is up 1% and Sensex is up 1.1% also. Notice that Nifty and Sensex mostly behave very similarly. They move similarly because a lot of the constituents are very similar. So, you'll you won't have a situation where Nifty is down 2% and Sensex is up 2%.

02:31That won't happen. Both of these move in a very similar way. So, when I want to add an index, all I need to do is type index, and then I type Sensex, and I add that. I get Sensex spot. So, when you're adding just the Sensex index, it's called the spot. So, it's this is the Sensex index. I'll also add index Nifty, and Nifty 50 is what the bellwether is

02:57normally. So, I can see that here. If I click on this button here, the Nifty 50 chart will open. So, as you can see, this is a daily chart, and you can see what the movement is.

03:10The market is generally moving up from the start of 2021 till now. Um similarly, I can also see what Sensex is doing on this date. Clicking on the chart, I can see where the market has gone. So, an index can also be sector-specific.

03:26So, I can add Bank Nifty over here. So, I can go and you might have guessed from the name, Bank Nifty is an index that comprises of banking stocks in the country.

03:41I can also add Fin Nifty. Fin Nifty is an index comprising of financial services and banks listed on the stock exchange. There is a small-cap index and a mid cap index and the large cap index is usually considered to be Sensex or Nifty. But I'll show you what the mid cap and small cap look like. Um so on Kite I'll search for Nifty small and I'll see I can see Nifty small cap

04:08here and I can add it. I can see the current price and where the market is. And finally, I can also search for Nifty mid and I'll get mid cap over here. So what are the uses of an index? One use is benchmarking. Let me give you an example. Suppose you have a portfolio that earned 20% in a particular year and you think that you've done very well and

04:36equities has given you good return. But you need to compare this to a benchmark. Let's suppose at that same period Nifty has given a 30% return. Now relatively speaking, you haven't beaten the benchmark. And this is very very useful for fund houses, even for yourself, to see whether your portfolio is meeting the benchmark, beating the benchmark or underperforming. Usually the objective of market participants is

05:02to outperform the benchmark. Generally speaking, if you have a large cap portfolio, your benchmark would be Nifty or Sensex. If you have a small cap portfolio, your index or your benchmark would be Nifty small cap. So on and so forth. If you have a sector specific portfolio, then you would compare it to that benchmark.

05:21The second use of the index is actually to trade it. So the examples we just saw were not tradeable because we had added spot prices. But traders trade Nifty futures very very often or other indices very often. For example, Bank Nifty futures. So the way to actually trade is to trade in futures and options of that index itself. So let me show you how this works on Kite. I'll simply on the market watch, search for Nifty futures.

05:52And I can see I have August, September, October. I'll select the August futures, and this is Nifty August. Notice this time when I click on the market depth, I can actually see bids and offers because this is actually tradeable. People are placing orders at this time and exiting and placing sell orders at this time. I can also see the total number of bids and total number of sells for this

06:18contract. So, just like you saw futures, Nifty and other indices can also be traded in the options market, but we'll get to that in future modules in the Varsity video series. So, the way an index is constructed, it's not that every single constituent or every single stock has the same weightage. It actually follows a market cap weightage methodology. If you're interested to know how this works, you should

06:44definitely read the Varsity chapter on it. And if you have any questions, then we're always there to help you out in the comment section there, too. Key takeaways from this chapter are