6. What is a stock market index? — Transcript

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1. 0:07Airline stocks on this day were mostly
2. 0:11up. The airline sector was clearly up on
3. 0:14this day because you can see these four
4. 0:16stocks that make up the airline sector
5. 0:18were higher than yesterday. Now, this
6. 0:21was easy to do with just four stocks.
7. 0:23But imagine if you had to figure out
8. 0:26whether the entire stock market was up
9. 0:29or down because BSE has some 5,000
10. 0:32stocks and National Stock Exchange has
11. 0:34some 2,000 stocks. Obviously, going
12. 0:37through all of those stocks is
13. 0:38impossible to determine whether the
14. 0:40general market is up or not. Hi, I'm
15. 0:42Pratik Singh. In this video, we'll be
16. 0:44talking about what an index is.
17. 0:56So, looking at the top 50 companies,
18. 0:58which is the Nifty index, or looking at
19. 1:00the top 30 companies, which forms the
20. 1:03BSE Sensex index, gives us an indication
21. 1:06whether generally the market was up or
22. 1:08not. Like in this example, you can see
23. 1:10the Nifty constituents, that means the
24. 1:1350 companies that form the index, were
25. 1:15mostly up. Hence, Nifty is up a few
26. 1:19points on this day. And that's basically
27. 1:21a way to know whether the market is
28. 1:23generally up or not by simply looking at
29. 1:25a single number, the index. A quick way
30. 1:28to remember this is Nifty 50 because it
31. 1:31rhymes. Nifty has 50 stocks and Sensex
32. 1:34actually is short for sensitivity index,
33. 1:37Sensex for short. So, you can check what
34. 1:39the index is doing by going to
35. 1:41nseindia.com and you can see what Nifty
36. 1:43is doing on that day. And you can go to
37. 1:46bseindia.com
38. 1:48to check out what the Sensex index is on
39. 1:50that particular day. You can also see
40. 1:53all of this information on your trading
41. 1:55terminal. You simply log in, add the
42. 1:57indices, and you can see where they are.
43. 1:59In fact, let me show what this looks
44. 2:01like on Zerodha Kite. I will log in
45. 2:04again.
46. 2:06Now, there are two ways to actually do
47. 2:07this. On the top left, I actually have
48. 2:10Nifty and Sensex. So, I can see that
49. 2:12Nifty is up 1% and Sensex is up 1.1%
50. 2:16also. Notice that Nifty and Sensex
51. 2:19mostly behave very similarly. They move
52. 2:22similarly because a lot of the
53. 2:24constituents are very similar. So,
54. 2:27you'll you won't have a situation where
55. 2:29Nifty is down 2% and Sensex is up 2%.
56. 2:31That won't happen. Both of these move in
57. 2:34a very similar way. So, when I want to
58. 2:37add an index, all I need to do is type
59. 2:40index, and then I type Sensex,
60. 2:42and I add that. I get Sensex spot. So,
61. 2:46when you're adding just the Sensex
62. 2:47index, it's called the spot. So, it's
63. 2:49this is the Sensex index. I'll also add
64. 2:53index Nifty,
65. 2:55and Nifty 50 is what the bellwether is
66. 2:57normally. So, I can see that here. If I
67. 3:00click on this button here, the Nifty 50
68. 3:03chart will open. So, as you can see,
69. 3:05this is a daily chart, and you can see
70. 3:07what the movement is.
71. 3:10The market is generally moving up
72. 3:13from the start of 2021 till now.
73. 3:16Um similarly, I can also see what Sensex
74. 3:18is doing on this date. Clicking on the
75. 3:20chart, I can see where the market has
76. 3:22gone. So, an index can also be
77. 3:25sector-specific.
78. 3:26So, I can add Bank Nifty over here.
79. 3:30So, I can go
80. 3:34and you might have guessed from the
81. 3:35name, Bank Nifty is an index that
82. 3:38comprises of banking stocks in the
83. 3:40country.
84. 3:41I can also add Fin Nifty.
85. 3:44Fin Nifty is an index comprising of
86. 3:46financial services and banks listed on
87. 3:49the stock exchange. There is a small-cap
88. 3:51index and a mid cap index and the large
89. 3:53cap index is usually considered to be
90. 3:56Sensex or Nifty. But I'll show you what
91. 3:59the mid cap and small cap look like. Um
92. 4:02so on Kite I'll search for Nifty small
93. 4:06and I'll see I can see Nifty small cap
94. 4:08here and I can add it. I can see the
95. 4:11current price and where the market is.
96. 4:13And finally, I can also search for Nifty
97. 4:15mid
98. 4:16and I'll get mid cap over here.
99. 4:22So what are the uses of an index? One
100. 4:25use is benchmarking. Let me give you an
101. 4:27example. Suppose you have a portfolio
102. 4:30that earned 20% in a particular year and
103. 4:33you think that you've done very well and
104. 4:36equities has given you good return.
105. 4:38But you need to compare this to a
106. 4:40benchmark. Let's suppose at that same
107. 4:42period Nifty has given a 30% return. Now
108. 4:46relatively speaking, you haven't beaten
109. 4:49the benchmark. And this is very very
110. 4:51useful for fund houses, even for
111. 4:53yourself, to see whether your portfolio
112. 4:55is meeting the benchmark, beating the
113. 4:57benchmark or underperforming. Usually
114. 5:00the objective of market participants is
115. 5:02to outperform the benchmark.
116. 5:05Generally speaking, if you have a large
117. 5:06cap portfolio, your benchmark would be
118. 5:08Nifty or Sensex. If you have a small cap
119. 5:11portfolio, your index or your benchmark
120. 5:13would be Nifty small cap. So on and so
121. 5:15forth. If you have a sector specific
122. 5:18portfolio, then you would compare it to
123. 5:19that benchmark.
124. 5:21The second use of the index is actually
125. 5:23to trade it. So the examples we just saw
126. 5:26were not tradeable because we had added
127. 5:28spot prices. But traders trade Nifty
128. 5:31futures very very often or other indices
129. 5:35very often. For example, Bank Nifty
130. 5:37futures. So the way to actually trade is
131. 5:39to trade in futures and options of that
132. 5:42index itself. So let me show you how
133. 5:44this works on Kite. I'll simply on the
134. 5:46market watch, search for Nifty futures.
135. 5:52And I can see I have August, September,
136. 5:55October. I'll select the August futures,
137. 5:58and this is Nifty August. Notice this
138. 6:01time when I click on the market depth, I
139. 6:03can actually see bids and offers because
140. 6:06this is actually tradeable. People are
141. 6:08placing orders at this time and exiting
142. 6:11and placing sell orders at this time. I
143. 6:14can also see the total number of bids
144. 6:16and total number of sells for this
145. 6:18contract. So, just like you saw futures,
146. 6:21Nifty and other indices can also be
147. 6:24traded in the options market, but we'll
148. 6:26get to that in future modules in the
149. 6:28Varsity video series. So, the way an
150. 6:31index is constructed, it's not that
151. 6:34every single constituent or every single
152. 6:36stock has the same weightage. It
153. 6:39actually follows a market cap weightage
154. 6:41methodology. If you're interested to
155. 6:43know how this works, you should
156. 6:44definitely read the Varsity chapter on
157. 6:47it. And if you have any questions, then
158. 6:49we're always there to help you out in
159. 6:50the comment section there, too. Key
160. 6:52takeaways from this chapter are