Major Indices in India
This sub‑topic covers the major equity indices that track the Indian stock market. Understanding these indices is essential for answering questions on index composition, calculation, and their role in derivatives. The content links the indices to the broader module on Equity Derivatives and highlights exam‑relevant details.
Learning Objectives
- 1Identify the key Indian equity indices and their characteristics
- 2Explain how major indices are constructed and maintained
- 3Interpret sectoral and thematic index classifications
- 4Apply index knowledge to derivative pricing and settlement
Key Indian Equity Indices
Nifty 50 is the flagship index of the National Stock Exchange (NSE) and represents the top 50 large‑cap stocks based on free‑float market capitalisation. It is widely used as a benchmark for equity funds and for pricing index futures and options.
S&P BSE Sensex comprises 30 well‑established companies listed on the Bombay Stock Exchange (BSE). Although it has fewer constituents than Nifty 50, it is equally important for gauging market sentiment and appears frequently in exam questions.
Other major indices include Nifty Bank (12 banking stocks), Nifty IT (10 information‑technology stocks), Nifty FMCG (15 fast‑moving consumer goods stocks), Nifty Midcap 100, and Nifty Smallcap 100. Each serves a specific purpose – from sector‑specific exposure to broader market coverage – and the NISM exam often asks candidates to match an index with its constituent base.
- Nifty 100 – top 100 stocks by free‑float market‑cap, covering roughly 70% of the market.
- Nifty 500 – a comprehensive index of 500 stocks, representing about 95% of the total market capitalisation.
Students often confuse the name of an index with the exact list of stocks it contains. Remember that Nifty 50 and Sensex have different constituent counts and selection criteria; the exam may ask you to identify which index uses a free‑float methodology (Nifty) versus a market‑cap methodology (Sensex).
How Indexes are Constructed
Indian equity indices are primarily constructed using the free‑float market‑capitalisation method. Only shares that are freely tradable (excluding promoter holdings, government holdings, etc.) are counted, ensuring the index reflects investable market depth.
SEBI mandates that the index provider (NSE for Nifty series, BSE for Sensex) review the constituent list quarterly. Adjustments are made for corporate actions such as stock splits, bonus issues, and mergers, with the divisor being recalibrated to keep the index level continuous.
Some legacy indices, like the Sensex, still use a slightly different weighting approach that incorporates total market‑cap rather than free‑float. Knowing the distinction helps you answer questions on index rebalancing and divisor adjustments.
Where:
P_i= Closing price of stock i in rupeesQ_i= Total number of issued shares of stock iF_i= Free‑float factor for stock i (0 < F_i ≤ 1)D= Divisor – a scaling factor chosen by the index providerN= Number of constituent stocks in the indexWorked Example
Given three stocks: Stock A: P=100, Q=100,000, F=0.60 Stock B: P=200, Q=500,000, F=0.50 Stock C: P=50, Q=200,000, F=0.80 Divisor D=10,000,000. Step 1: Compute weighted market‑cap for each stock: A = 100 × 100,000 × 0.60 = 6,000,000 B = 200 × 500,000 × 0.50 = 50,000,000 C = 50 × 200,000 × 0.80 = 8,000,000 Step 2: Sum = 6,000,000 + 50,000,000 + 8,000,000 = 64,000,000 Step 3: Index = 64,000,000 / 10,000,000 = 6.4 Verification: (6,000,000 + 50,000,000 + 8,000,000) / 10,000,000 = 6.4.
Major Index Characteristics
Each index has a base year and a base value (usually 100 or 1,000). For example, Nifty 50 was launched in 1996 with a base value of 1,000, while the Sensex started in 1978 with a base of 100. The base year is crucial for calculating historical returns and for interpreting long‑term performance charts.
The divisor is adjusted whenever there is a corporate action that would otherwise cause a sudden jump in the index level. This adjustment ensures continuity and prevents artificial volatility. The divisor is not disclosed publicly, but its effect is reflected in the smooth movement of the index.
Rebalancing frequency differs: Nifty indices are reviewed quarterly, whereas the Sensex is reviewed semi‑annually. The exam may test you on the timing of these reviews because they affect the eligibility of stocks for inclusion or exclusion.
Comparison of Nifty 50 and Sensex
| Feature | Nifty 50 (NSE) | Sensex (BSE) |
|---|---|---|
| Number of constituents | 50 | 30 |
| Base year | 1996 | 1978 |
| Base value | 1,000 | 100 |
| Weighting method | Free‑float market‑cap | Market‑cap (total) |
| Review frequency | Quarterly | Semi‑annual |
A common mistake is to assume all Indian indices are reviewed quarterly. The Sensex follows a semi‑annual schedule, which can affect questions on when a stock may be added or removed.
Sectoral and Thematic Indices
Sectoral indices track specific industry groups. The most traded are Nifty Bank, Nifty IT, Nifty Pharma, and Nifty FMCG. These indices use the same free‑float methodology but restrict the constituent universe to the relevant sector, making them useful for sector‑focused derivative contracts.
Thematic indices such as Nifty 100 and Nifty 500 broaden the coverage. Nifty 100 captures the top 100 stocks, while Nifty 500 includes the largest 500 stocks across all sectors, representing the bulk of market capitalisation. Knowing which index a derivative contract references is vital for correct margin and settlement calculations.
Exam questions often present a scenario like "an investor wants exposure to the banking sector without buying individual stocks" – the correct answer will point to Nifty Bank futures or options.
Sector Weightage in Nifty 50 (Approx.)
Practical Use in Derivatives
Index futures and options are settled in cash based on the closing value of the underlying index. For Nifty 50 futures, the contract size is ₹75 per index point, so a 100‑point move translates to a ₹7,500 profit or loss. Understanding the index composition helps you anticipate price movements driven by sectoral news.
When an index undergoes a rebalancing, the futures price may exhibit a temporary drift as market participants adjust positions. The exam may test you on the impact of a rebalancing on open interest and settlement price.
Additionally, the concept of basis – the difference between the spot index and the futures price – is crucial for arbitrage strategies. A narrow basis indicates efficient pricing, whereas a wide basis may present an arbitrage opportunity.
Scenario
Rohan buys one Nifty 50 futures contract on 1 May at a price of 18,200. The contract size is ₹75 per point. On 15 May, the index closes at 18,450 and the futures settle at the same level.
Solution
Step 1: Determine the point movement: 18,450 – 18,200 = 250 points. Step 2: Multiply by contract size: 250 × ₹75 = ₹18,750. Since Rohan was long, this amount is his profit. Step 3: Account for transaction costs (assume ₹500 brokerage). Net profit = ₹18,750 – ₹500 = ₹18,250. The calculation shows how a modest index move can generate a sizable cash profit due to the leverage inherent in futures.
Conclusion
The example illustrates why precise index price knowledge and contract specifications are essential for accurate profit‑and‑loss calculations in the exam.
Exam Takeaways
⭐Exam Takeaways
- Nifty 50 (NSE) and Sensex (BSE) are the two flagship indices; Nifty uses free‑float market‑cap weighting while Sensex uses total market‑cap.
- Index calculation follows the formula \frac{\sum (P_i \times Q_i \times F_i)}{D}; the divisor adjusts for corporate actions to keep the index level continuous.
- Quarterly review applies to Nifty indices; Sensex is reviewed semi‑annually – a frequent source of exam errors.
- Sectoral indices (e.g., Nifty Bank, Nifty IT) are derived from the same methodology but limit constituents to a specific industry, useful for targeted derivative contracts.
- Futures contract size for Nifty 50 is ₹75 per point; profit/loss is calculated as (price change) × contract size, adjusted for brokerage and other charges.
- Rebalancing events can cause short‑term price drift in index futures; the exam may ask about the effect on open interest and settlement price.
- Remember the base year and base value when computing long‑term returns; Nifty 50 base year 1996 (value 1,000), Sensex base year 1978 (value 100).
- Sector weightage percentages in Nifty 50 sum to roughly 100%; knowing the top sectors helps answer questions on market‑wide movements.
Practice Questions
9 questions on Major Indices in India
Which of the following indices comprises exactly 50 stocks?
The Sensex weighting methodology is based on:
How often are the constituent lists of Nifty indices reviewed?
What is the index level obtained from the example with three stocks (A, B, C) and divisor 10,000,000?
Rohan bought one Nifty 50 futures contract at 18,200. The index settled at 18,450. After paying a brokerage of ₹500, what is his net profit?
Which index uses the free‑float market‑capitalisation method for weighting its constituents?
According to the sector weightage chart for Nifty 50, which sector has the highest percentage?
What is the primary purpose of adjusting the divisor when a corporate action occurs?
During a quarterly rebalancing of Nifty 50, which effect is most likely observed in the corresponding futures contract?