Explained: Types of equity indices

Very often, we come across articles such as, “Sensex, Nifty trade at day’s high” or “Indices end in green, led by IT”. But what do they mean?

For the uninitiated, Sensex and Nifty are indices that are composed of a group of stocks that is representative of the whole market. They depict the overall behaviour in the markets. While these two are the most widely used indices, there are plenty of others that also track a specified sector or segment of the market.  

Let’s take a look at the different types of equity indices: 

Broad market index 

A broad market index, as the name suggests, represents the overall performance of that particular market. It is the one that catches the pulse of the overall market sentiment. This type of index consists of the large, liquid stocks listed on a particular exchange and is used as a benchmark to measure the performance of individual stocks or portfolio of stocks. Sensex and Nifty 50 are prime examples of broad market indices.  

Sectoral index  

This type of index tracks the performance of different economic sectors. Sectoral indices help to gauge the sentiment of investors and traders towards a particular sector such as consumer goods, auto, IT, etc. These indices can be used to benchmark the performance of an individual stock or a portfolio of stocks that fall within that particular sector. Some of the sectoral indices are S&P BSE AUTO, NIFTY IT Index, S&P BSE BANKEX, etc. 

Thematic Index 

Thematic indices are the ones that reflect the performance of companies that form part of a particular segment. For instance, NIFTY Infrastructure index includes companies belonging to Telecom, Power, Port, Air, Roads, Railways, shipping and other Utility Services providers whereas, NIFTY Commodities index includes stocks from sectors such as Oil, Petroleum Products, Cement, Power, Chemical, Sugar, Metals and Mining etc. 

Strategy index 

This index tracks the performance of a specified trading strategy. For instance, NIFTY Multi-Factor Indices are designed to reflect the performance of a portfolio of stocks that are selected based on the combination of 2 or more factors selected from four single-factors namely, Quality, Value, Alpha and Low Volatility. These indices aim to counter the cyclicality of a single factor index strategy and provide investors with a choice to take exposure to multiple factors through a single index product.