A stock index or a stock market index is a measure of the weighted average of the value of the stocks which form the index. Stock index is considered to reflect the performance of the whole country’s stock market for a given time period. In India, major indexes are BSE Sensex and NSE NIFTY. Nifty 50 approximately represents 63% of the free float market capitalisation of all stocks listed on NSE, as of 31-3-17.
Stock index is referenced to the base year like for example, base value of BSE Sensex is 100, as of 1st April 1979. The constituents of an index may change (addition of new stocks / deletion of existing stocks) to reflect changes in the economy.
A stock index helps investors to compare the return of a particular stock to the index/es which it belongs to. It also specifies the sentiment in the market based on their movements.
For example: 10 year annualised return of HDFC Bank is 28.06% whereas the annualised return of Bank NIFTY which forms the index for most of the listed banks in India is 20.11%. Therefore we can say that HDFC Bank has out-performed the index.
Stock indexes can be classified in various ways depending on the market capitalization of the company or based on the sector to which that company belongs.
A stock like TCS will therefore be present in both NIFTY 50 as well as NIFTY IT as it belongs to the IT Sector which represents the major IT companies present in the country.
For example NIFTY 50 represents the top 50 companies in the Indian Stock market, based on their free float market capitalisation, along with factors like its performance and trading volume in the stock.