We have heard many times that today the stock market is going up, or the stock market is going down. These type of sentences make us curious and raise several questions like what is this stock market? How does it work? It clearly shows that there is some kind of measurements or different ways through which we could know about the stock market. Stock Market shows the growth of share market all over the country on the same platform. It includes all sectors of the resources and in a combined form shows the status of the Stock Market. We will cover some brief discussion on topics such as Other Indices, Benchmark of Indices, the Calculation process of Index etc. But before we go on these topics, let’s learn about categories of companies in the Stock Market.
We have talked about the Bombay Stock Exchange and National Stock Exchange, Sensex and Nifty, etc in another article.
Check it out here | Stock Market for Beginners
Category of Company in Stock Market
On the basis of size and capitalization companies are basically divided into three types i.e Large Cap, Mid Cap and Small Cap companies. The Cap basically signifies the capitalization. Market capitalization shows the aggregate valuation of the company. It also shows the size of the companies. Now let’s discuss these companies individually.
Large Cap Companies
The companies having a market capitalization value greater than 75000 crores are Large Cap Companies. These are the big and well-established companies in the stock market. They have a strong market presence. TCS, Reliance Industries, L & T etc are some examples of the Large Cap companies. Almost all these companies are a leader company in their respective sectors. Most of the large-cap companies involve in Nifty and Sensex.
Mid Cap and Small Cap Companies
Mid cap companies are companies have market capitalization value in between 13000 to 75000 crores. And the companies having market capitalization value less than 13000 crores are small-cap companies. Most of the small-cap companies are in the starting phase of any startup or developing companies. So these companies have more growth possibilities but due to failure rate risk possibility are also high.
Indices of the Stock Exchange
There are some other indices of the stock exchange in India apart from Nifty and Sensex. They work the same as Nifty and Sensex but they cover stock performance of the different sectors. Some of them are Sectoral Indices, Small Cap Indices, Mid Cap Indices, etc. We will discuss these topics in brief.
BSE and NSE have indices of different sectors. Sectoral Indices are the indices of a particular sector, involves well-establish companies of that sector. It signifies the performance of a particular stock market sector. Suppose we have to see the Banking sector performance of the Stock Market. So we have to track the stock market performance of that sector from Bankex which is indices of BSE, and Bank Nifty from NSE.
Small Cap and Mid Cap Indices
There are also separate indices for small-cap and mid-cap companies in the stock exchange. Many investors interested in small-cap funds because these companies are more sensitive towards economic growth and domestically focused. They highly leverage to the economy and expose to the economic cycle. Some small-cap indices are S&P BSE Small-Cap, Vanguard Small-Cap Index Fund(VB), etc.
The term “mid-cap” is given to the companies on the basis of their market capitalization. For investors, mid-cap companies hold an appealing future due to their growth prospect and expected an increase in their profit, market share, and productivity. They are less risky as compare to small-caps. S&P BSE Mid-Cap, Nifty Mid Cap Fifty, etc are the examples of mid-cap indices.
Indices as Benchmark
A benchmark is a reference point against which the performance of the stock market compared. It is the standard against which we can measure the performance of the stock market investment. Nifty, Sensex and other indices used as the benchmark in the stock market. With the help of these benchmarks, we can compare the returns of our investment.
For example, in 2014, the return rate value of Nifty and Sensex was 31.43% and 29.58% respectively. We can compare the return on investment from the above value in that year. If the return of investment is more than the value then the investment return is good and vice versa. Similarly, we can compare the return value in a different sector also. Banking sector investment compares with the return value of Indices like Bankex or Bank Nifty.
Calculation of Indices
The indices are calculated by Free Float Market Capitalisation Method. In this method, the market capitalization of an index of underlying companies calculated. It is a better way of calculating market capitalization because it provides a more accurate reflection of market movements. And also provides the availability of active stocks for trading in the market. Indices are often weighted by either price or capitalization in the market. So, Sensex is the free float market capitalization of the weighted average value of 30 companies involved in Sensex. And the same is for Nifty which involves 50 companies. It is not necessary to go in detail about the calculation of indices. We have to only monitor the performance of Nifty and Sensex whether they are increasing or decreasing.
Replacement of Stocks in the Stock Exchange
The stock exchange has full right to replace any stock from the Indices. That is, if the performance of any stock is diminishing day by day then stock exchange has the right to replace that stock with other well-established and consistent stock. Like in 2016, NSE replaced Cairned India, Vedanta, and PNB from Nifty. They were replaced with Aurobindo Pharma, Bharti Infratel, and Eicher Motors respectively on the basis of their performance.
We can also know about the status of the stock market of other countries through their stock exchange indices. For example, if we want to know the stock market condition of Japan we can monitor it through the performance of Tokyo stock exchange indices NIKKEI.
So here we covered all the topics mentioned in this. We hope it helps you to understand about the Indian stock market and its working. If you have any queries related to any topic feel free to comment below.