7.1 – Overview
If I were to ask you to give me a real-time summary of the traffic situation, how would you possibly do it?
Your city may have 1000’s of roads and junctions; it is unlikely you would check every road in the city to find the answer. The wiser thing for you to do would be to quickly check a few important roads and junctions across the city’s four directions and observe how the traffic is moving. If you observe chaotic conditions across these roads, you would simply summarize the traffic situation as chaotic, else traffic can be considered normal.
The few important roads and junctions that you tracked to summarize the traffic situation served as a barometer for the entire city’s traffic situation!
Drawing parallels, if I were to ask you how the stock market is moving today, how would you answer my question? There are approximately 5,000 listed companies in the Bombay Stock Exchange and about 2,000 listed companies on the National Stock Exchange. It would be clumsy to check every company, figure out if they are up or down for the day and then give a detailed answer.
Instead, you would just check a few important companies across key industrial sectors. If a majority of these companies are moving up, you would say markets are up, if the majority is down, you would say markets are down, and if there is a mixed trend, you would say markets are sideways!
So essentially identify a few companies to represent the broader markets. Every time someone asks you how the markets are doing, you would just check the general trend of these selected stocks and then answer. These companies that you have identified collectively make up the stock market index!
7.2 – The Index
Luckily you need not actually track these selected companies individually to get a sense of how the markets are doing. The important companies are pre-packaged and continuously monitored to give you this information. This pre-packaged market information tool is called the ‘Market Index’.
There are two main market indices in India. The S&P BSE Sensex representing the Bombay stock exchange and CNX Nifty representing the National Stock exchange.
S&P stands for Standard and Poor’s, a global credit rating agency. S&P has the technical expertise in constructing the index which they have licensed to the BSE. Hence the index also carries the S&P tag.
CNX Nifty consists of the largest and most frequently traded stocks within the National Stock Exchange. It is maintained by India Index Services & Products Limited (IISL), a joint venture of the National Stock Exchange and CRISIL. In fact, the term ‘CNX’ stands for CRISIL and NSE.
An ideal index gives us minute by minute reading about how the market participants perceive the future. The movements in the Index reflect the changing expectations of the market participants. When the index goes up, it is because the market participants think the future will be better. The index drops if the market participants perceive the future pessimistically.
7.3 – Practical uses of the Index
Some of the practical uses of Index are discussed below.
Information – The index reflects the general market trend for a period of time. The index is a broad representation of the country’s state of the economy. A stock market index that up indicates people are optimistic about the future. Likewise, when the stock market index is down, people are pessimistic about the future.
For example, the Nifty value on the 1st of January 2014 was 6301, and the value as of 24th June 2014 was 7580. This represents a change of 1279 points in the index of a 20.3% increase. This simply means that during the time period under consideration, the markets have gone up quite significantly, indicating a strong optimistic economic future.
The time frame for calculating the index can be for any length of time. For example, the Index at 9:30 AM on 25th June 2014 was at 7,583, but an hour later it moves to 7,565. A drop of 18 points during this period indicates that the market participants are not too enthusiastic.
Benchmarking – For all the trading or investing activity that one does, a yardstick to measure the performance is required. Assume over the last 1 year you invested Rs.100,000/- and generated Rs.20,000 return to make your total corpus Rs.120,000/-. How do you think you performed? Well on the face of it, a 20% return looks great. However, what if Nifty moved to 7,800 points from 6,000 points generating a return on 30% during the same year?
Well, suddenly it may seem to you that you have underperformed the market! If not for the Index, you can’t really figure out how you performed in the stock market. You need the index to benchmark the performance of a trader or investor. Usually, the objective of market participants is to outperform the Index.
Trading – Trading on the index is probably one of the most popular uses of the index. Majority of the traders in the market trade the index. They take a broader call on the economy or general state of affairs and translate that into a trade.
For example, imagine this situation. At 10:30 AM, the Finance Minister is expected to deliver his budget speech. An hour before the announcement Nifty index is at 6,600 points. You expect the budget to be favourable to the nation’s economy. What do you think will happen to the index? Naturally, the index will move up. So to trade your point of view, you may want to buy the index at 6,600. After all, the index is the representation of the broader economy.
So as per your expectation, the budget is good, and the index moves to 6,900. You can now book your profits, and exit the trade at a 300 points profit! Trades such as these are possible through what is known as the ‘Derivative’ segment of the markets. We are probably a bit early to explore derivatives, but for now, do remember that index trading is possible through the derivative markets.
Portfolio Hedging – Investors usually build a portfolio of securities. A typical portfolio contains 10 – 12 stocks which they would have bought from a long term perspective. While the stocks are held from a long term perspective, they could foresee a prolonged adverse movement in the market (2008), potentially eroding the capital in the portfolio. In such a situation, investors can use the index to hedge the portfolio. We will explore this topic in the risk management module.
7.4 – Index construction methodology
It is important to know how the index is constructed /calculated especially if one wants to advance as an index trader. As we discussed, the Index is a composition of many stocks from different sectors that collectively represent the economy’s state. To include a stock in the index, it should qualify certain criteria. Once qualified as an index stock, it should continue to qualify on the stated criteria. If it fails to maintain the criteria, the stock gets replaced by another stock that qualifies the prerequisites.
Based on the selection procedure, the list of stocks is populated. Each stock in the index should be assigned a certain weightage. Weightage in simpler terms defines how much importance a certain stock in the index gets compared to the others. For example, if ITC Limited has 7.6% weightage on the Nifty 50 index, then it is as good as saying that the 7.6% of Nifty’s movement can be attributed to ITC.
The obvious question is – How do we assign weights to the stock that make up the Index?
There are many ways to assign weights, but the Indian stock exchange follows a free-float market capitalization method. The weights are assigned based on the company’s free-float market capitalization, the larger the market capitalization, the higher is the weight.
Free float market capitalization is the product of the total number of shares outstanding in the market and the stock price.
For example company, ABC has 100 shares outstanding in the market, and the stock price is at 50 then the free-float market cap of ABC is 100*50 = Rs.5,000.
At the time of writing this chapter, the following are the 50 stocks in Nifty as per their weightage:
| Sl No | Name of the company | Industry | The weightage (%) |
|---|---|---|---|
| 01 | ITC Limited | Cigarettes | 7.60 |
| 02 | ICICI Bank Ltd | Banks | 6.55 |
| 03 | HDFC Ltd | Housing Finance | 6.45 |
| 04 | Reliance Industry Ltd | Refineries | 6.37 |
| 05 | Infosys Ltd | Computer Software | 6.26 |
| 06 | HDFC Bank Ltd | Banks | 5.98 |
| 07 | TCS Ltd | Computer Software | 5.08 |
| 08 | L&T Ltd | Engineering | 4.72 |
| 09 | Tata Motors Ltd | Automobile | 3.09 |
| 10 | SBI Ltd | Banks | 2.90 |
| 11 | ONGC Ltd | Oil Exploration | 2.73 |
| 12 | Axis Bank Ltd | Banks | 2.50 |
| 13 | Sun Pharma Ltd | Pharmaceuticals | 2.29 |
| 14 | M&M Ltd | Automobiles | 2.13 |
| 15 | HUL Ltd | FMCG | 1.87 |
| 16 | Bharti Airtel Ltd | Telecom Services | 1.70 |
| 17 | HCL Technologies Ltd | Computer Software | 1.61 |
| 18 | Tata Steel Ltd | Metal -Steel | 1.42 |
| 19 | Kotak Mahindra Bank Ltd | Banks | 1.40 |
| 20 | Sesa Sterlite Ltd | Mining | 1.38 |
| 21 | Dr Reddy’s Lab Ltd | Pharmaceuticals | 1.37 |
| 22 | Wipro Ltd | Computer Software | 1.37 |
| 23 | Maruti Suzuki India Ltd | Automobile | 1.29 |
| 24 | Tech Mahindra Ltd | Computer Software | 1.24 |
| 25 | Hero Motocorp Ltd | Automobile | 1.20 |
| 26 | NTPC Ltd | Power | 1.15 |
| 27 | Power Grid Corp Ltd | Power | 1.13 |
| 28 | Asian Paints Ltd | Paints | 1.10 |
| 29 | Lupin Ltd | Pharmaceuticals | 1.09 |
| 30 | Bajaj Auto Ltd | Automobile | 1.07 |
| 31 | Hindalco Industries Ltd | Metal – Aluminum | 0.95 |
| 32 | Ultratech Cements Ltd | Cements | 0.95 |
| 33 | Indusind Bank Ltd | Banks | 0.94 |
| 34 | Coal India Ltd | Mining | 0.93 |
| 35 | Cipla Ltd | Pharmaceuticals | 0.89 |
| 36 | BHEL Ltd | Electrical Equipment | 0.79 |
| 37 | Grasim Industries Ltd | Cements | 0.79 |
| 38 | Gail (India) Ltd | Gas | 0.78 |
| 39 | IDFC Ltd | Financial Services | 0.74 |
| 40 | Cairn India Ltd | Oil Exploration | 0.72 |
| 41 | United Spirits Ltd | Distillery | 0.70 |
| 42 | Tata Power Co.Ltd | Power | 0.68 |
| 43 | Bank of Baroda | Banks | 0.63 |
| 44 | Ambuja Cements Ltd | Cements | 0.61 |
| 45 | BPCL | Refineries | 0.58 |
| 46 | Punjab National Bank | Banks | 0.55 |
| 47 | NMDC Ltd | Mining | 0.52 |
| 48 | ACC Ltd | Cements | 0.50 |
| 49 | Jindal Steel & Power | Steel | 0.38 |
| 50 | DLF Ltd | Construction | 0.34 |
As you can see, ITC Ltd has the highest weightage. This means the Nifty index is most sensitive to price changes in ITC Ltd and least sensitive to price changes in DLF Ltd.
7.5 – Sector-specific indices
While the Sensex and Nifty represent the broader markets, certain indices represent specific sectors. These are called the sectoral indices. For example, the Bank Nifty on NSE represents the mood specific to the banking industry. The CNX IT on NSE represents the behaviour of all the IT stocks in the stock markets. Both BSE and NSE have sector-specific indexes. The construction and maintenance of these indices are similar to the other major indices.
Key takeaways from this chapter
- An index acts as a barometer of the whole economy.
- An index going up indicates that the market participants are optimistic.
- An index going down indicates that the market participants are pessimistic.
- There are two main indices in India – The BSE Sensex and NSE’s Nifty
- An index can be used for a variety of purposes – information, benchmarking, trading and hedging.
- Index trading is probably the most popular use of the index.
- India follows the free-float market capitalization method to construct the index.
- There are sector-specific indices which convey the sentiment of specific sectors.
Hi sir, very excellent initiative by zerodha.
My question is why almost all stocks trade both in NSE and BSE?
They are two different exchanges/markets. There are several companies in BSE that are not listed in NSE.
Why would a company only trade on one indice?
Not true – for example TCS trades on Nifty, CNX IT, CNX 100, and CNX 500.
Sorry you did not get the gist of my question. You had said “There are several companies in BSE that are not listed in NSE.” Why would a company choose to be traded on one indice?
Oh I get it now 🙂
The inclusion in the Index is at the discretion of the index owner (exchanges). So BSE has its own methodology based on which they select the index constituents and so does NSE. Hence they differ. However all 30 stocks in Sensex are included in Nifty 50 or just Nifty.
Aren’t the indices decided on by the credit rating agency and not the BSE or NSE or any other exchange?
Nope, there are separate entities which maintain indices. For example Nifty is maintained by – http://www.nseindia.com/supra_global/content/iisl/about_iisl.htm
Well, relax because your question is not relevant to the trading opportunities for market participants.
How do we know that the stock we buy is listed on bse or nse ???
You basically have the option to select the exchange before you buy the stock.
how can i know company’s ipo has launched? what things we must have to know before investment in ipo? And how can we know?
A general track on business news will keep you posted on new IPO’s. Alternatively keep a watch here – http://www.nseindia.com/products/content/equities/ipos/homepage_ipo.htm
A summary of the due diligence required before applying for an IPO is discussed here – http://tradingqna.com/1329/investor-determine-investing-company-available-exchanges?show=1329#q1329
hi sir,
can we download this modules for offline reading???
Thanks, but this may not be possible for now !
Where do I get updated information on weightage of stocks in the Nifty?
Download the 2nd excel sheet from here http://www.nseindia.com/products/content/equities/indices/cnx_nifty.htm to keep a tab on latest Nifty weight-age
Hello….in the excel…weightage is not mentioned…how do we decide then
Its decided based on the free float market capitalization.
how frequently does the list get updated?
Check this – http://www.nseindia.com/products/content/equities/indices/nifty_50.htm
Hi,
I’ll check here. http://www.indiainfoline.com/marketstatistics/index-movers/nse/nifty
Mostly we see, the value of a particular stock differs from BSE to NSE. So, Can I buy a stock from NSE and sale the same at BSE ?Thanks
Yes you can. But make sure you buy back the stock that you have sold before 3:20 PM.
Karthik. Why is it like that ? What if I dont buyback the stock before 3:20 ? Can you pls. elaborate further. Thank You.
Sorry for that above posting. You have already answered in the below posting which I didn’t see earlier. My apologies.
Is there any way I can delete my previous posting ? Thanks again.
Ah, thats alright 🙂
Sir, you have said that ” make sure you buy back the stocks you sold at BSE bought from NSE” for mr.Anant query, why it necessary to buy back the stocks?
That is because Anant is referring to a trading strategy called “Cash and Carry Arbitrage”, where you sell stocks on one exchange and buy the same on another. We will discuss in one of the future modules.
indeed a nice tutorial…. I want to know how do we buy and sell nifty? Are any tutorial already available in z-connect? If yes, where its placed? Please explain little bit briefly between buying and selling the securities between two exchanges BSE and NSE? Like if I bought a security in NSE, but it’s not listed in BSE, so, can I be allowed to sell it in BSE?
If the stock is listed in only 1 exchange you cant sell it in the other. Will be dedicating a chapter completely on Nifty in the ‘Futures module’.
was very informative.will soon see company emerging as an Investment bank.Must focus on discount stocks am currently holding Educomp bought @18 RS 1000 Q with 5 Year time frame.Must be a different company who focus on discount stocks rather than one at premium
Good luck with that Ranjit. Glad you liked the content here.
Very helpful -thank you Zerodha
Thanks 🙂
Sir,
Great Initiative by you, helps a lot for people from non-commercial backgrounds.
Is there any eligibility criteria to get listed in BSE ? What if more that 30 companies are eligible how will the BSE decide which one to choose ?
You must be referring to BSE Sensex index. The exchange has a set of rules based on market cap and free float…if a company qualifies these conditions then the exchange adds it to the index.
when i place a buy order… will there be any difference whether i make it on nse or bse??
and by the way… u guys are great… i would never have found all this information in such a lucid way anywhere else .. 🙂
Thanks for the kind words Pramod 🙂
Yes, there is a price difference between BSE and NSE although not much.
I wanted to know about the free float market capitalization technique.
You specified it means “No.of outstanding shares in market X price of the stock”.
What is meant by the outstanding shares in the market?
Does it mean the shares which are still not owned by anyone and is available in the market?
Or does it mean all the shares that is eligible to be traded in the market (even if it is currently owned by someone)?
Free Float represents the number of shares that are outstanding in the markets – like you said “does it mean all the shares that is eligible to be traded in the market (even if it is currently owned by someone)?”….exactly what it means.
price of stock may vary each day….so does that mean….every day the list keeps changing…or they fix the price…
As I said…its based on Free Float Market Cap.
Hi, I would like to ask: isn’t this the full market capitalization method? Outstanding shares × share price. Isn’t free float market cap method: outstanding shares (minus locked-in shares held by other corporations… government…) × share price. And another question: there is a page where I can find the free float factor or the exact number of outstanding shares (without locked-in shares) of nifty or bse index?
In fact this is what I’ve mentioned here – “Free float market capitalization is the product of total number of shares outstanding in the market, and the price of the stock”
Free float data is published by NSE, check this – http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=TCS&illiquid=0&smeFlag=0&itpFlag=0
Free Float data is mentioned above 52 week high.
But where to see the number of outstanding shares?
Available in the annual report of the company.
Sorry, I’ve been quite rude, two questions without saying thank you for the ebook and the time!
Most welcome 🙂
Hello karthik,
Here you mention that i can buy from one exchange and sell it by another exchange. And it is possible in CNC only and not in future , am i right ?
Right, not possible on futures for technical reasons.
great work!!!!!
say a company has 100 stocks and i bought 10 of them. so now i am the owner of 10 % of the company. now my question is— till i hold the stocks will i get the 10% of companies profit?? or my profit or loss depends only on buying and selling the stocks??
Yes, you will be 10% owner. You will get 10% of the profits via dividends. The profit or loss depends on the appreciation of the stock price.
can you explain the dividend part a bit…
as in how we would receive 10% dividend….if we take the above example
Explained here – http://zerodha.com/varsity/chapter/five-corporate-actions-and-its-impact-on-stock-prices/
Hi,
I read the lists of companies and their weightage. Please tell me that this weightage is fixed for all the time or it changes on some factors.
Thanks.
With increase/decrease in stock price, the free float market cap of the stock changes and with this the weightage also changes.
Hi Sir,
I have one query regarding the benefits that one would get by investing on stocks with higher prices. For example, consider TCS shares currently having value around 2330.00. If a person is investing 20K for TCS, he may be getting 9 shares for this price.
I was wondering what benefits could investors have on such stocks. ?
Benefits are of 2 kinds –
1) Capital appreciation meaning if TCS does well as a business then the stock price will also go up…lets say it goes to 2500, then your 20K investment is not valued at 25K.
2) Dividend payout – Companies payout dividends to its shareholders. This is like a rental income on your property. Its not necessary that all companies should pay dividends, but most of them do. So if TCS gives out Rs.10 per share as dividend then you get Rs.90/- as dividends income.
Thanks for your quick clarification.. 🙂
By those benefits, does that mean, the stocks of higher values yield the same as lower ones..?
For example, the same 20K can be used to buy shares of other company say, Rs.50 per share. An increase in Rs.5 per share would yield us a profit of(400*5 ) Rs .2000 which would be the same as the TCS shares would have given us.
Am I right?
Just out of curiosity, what would be the general trend in this case. Would some one be willing to invest in such large share value,
or just go ahead with the latter ones?
By the way, I forogt to mention one thing.. You are awesome.. and your blog contents are simplicity at its peak 🙂
hi my question is about premarket buying. suppose nifty index is trading at 7600 today and closes at 7560.Same day suppose there is a bad news after markets close and i anticipate the index to fall drastically . so i decide to short nifty futures or buy a put option.but waiting till tomorrow after markets open seems to be a bad idea to me because the markets would open far less price than todays closing .in this scenario is it a good idea to buy in the after market hours today or premarket tomorrow
In AMO or Pre market you can only place an order but the execution will happen only after the market opens. Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/pre-marketpost-marketafter-market-orders
Hi,
Is there a specific volume ratio for the shares of a company that are being traded in both the exchanges ?
What i mean here when company steps from primary to the secondary market how is it decided how many shares will trade in which exchange ?
In case if there is a shortage in one exchange and if there is a surplus in the other ?
Thanks.
Usually a certain portion of the share capital gets listed on the exchange. In simpler terms – if the total number of shares are 100, then the company can decide to issue 10%, say 10 shares to be listed. This will get traded on exchanges.
Thanks. I understand about companies decisions. My doubt was with respect to bse and Nse. How much of this stock they get to list in their respective exchanges. Incase of high demand in one exchange does it get fulfilled by the other? I was comparing Google charts of a Tata motors where at a particular time there was a heavy volume traded in both the exchanges however there was a slight difference in price bse being on the higher side by appx 1 rupee
Bopanna, you can buy stock in NSE and sell in BSE or vice versa. Eventually it all depends on liquidity and who offers the better rate.
Hie Karthik sir.
Your systematic explanation of stock market is fascinating . Indeed it should be incorporated in schools and colleges. I believe, financial literacy is must in today’s time. Thank you for such a great content.
One question: Say, it is 10 in the morning and there is a company ‘A’ whose FFMC does not qualify it to be under top 50 companies of Nifty. However, after doing superbly well in the market, its FFMC exceeds company B’s FFMC, that is listed under top 50 companies of Nifty, at 1 in the afternoon. So will it replace the company B at that very instant or changes in the Nifty will be reflected after the market gets closed?
Thanks for the kind words Rajat. I do agree financial literacy is extremely important in today’s time 🙂
The decision to include a company within Nifty 50 is an eloborate process and happens once a quarter by the exchanges. In fact exchange cannot afford to change the index constituents on the go.
This should help – http://www.nseindia.com/products/content/equities/indices/indices.htm
Thank you 🙂
sir i have one doubt / what are the issues in selection a procedure of stocks in nifty fifty index/ please anybody can answer these question pls
There are a set of qualities they look for including trading volume, liquidity, market capitalization etc. NSE has listed down these details on their website.
Where can I get a summary of the Indian stock market (size, liquidity, restriction, valuation, etc.)
You will have to source this from couple of website, I’d suggest NSE India for trading information and http://www.ratestar.in/ for fundamental information.
There is type in the table mentioning the stock “Reliance Industry Ltd” should be “Reliance Industries Ltd”.
Thanks, will get that corrected.
Excellent series of articles. I have one question. You have shown the table listing the Nifty 50 index by weight age. Where can I find such list. I tried going through nifty website, but couldn’t find any such list?
Here you go – https://www.nseindia.com/products/content/equities/indices/nifty_50.htm
Hi Karthik,
I wanted to know, in kite why can’t I load indices?
Its available, check this – https://kite.trade/docs/kite/#marketdepth
Sorry I can’t locate it. Could you help me loading major indices like nifty 50 and sensex. I am unable to open both indices on pi and kite.
Check this – http://support.zerodha.com/kb/faq.php?id=195
Hi Karthik
I would like to know whether rise and fall of Nifty is mathematically equal to rise and fall of 50 companies in Nifty? Or does Nifty have its own sentiments separate from the companies it comprises of?
Say for the sake of simplicity, all companies in Nifty have equal Market capitalization and they all raise by exactly 1%, so can it be possible that Nifty may rise to figure other than 1% also?
Also does Global news affect Nifty directly or is it through the companies listed in Nifty.
Basically I want to know is everything mathematically accurate ?
Yes, Nifty factors in the movement of each stock according to its respective weight age. Yes, if all companies have equal MC, then Nifty will assign equal weightage and movement will be linear….although this does not really happen in real life.
Hi Karthik, doubt not related to this chapter.
SLBS: just dial LTP =4.00
UNDERLYING LTP=433.50
FUTURES LTP= 429.20
ANNUALISED YIELD=9.91%
now my doubt is what is LTP=4.00 and how they arrive at 9.91% p.a???? please clear my doubt sir
Thanks&Regards
When you lend the underlying in spot market under the SLBM scheme you do get an interest. 9.91% is annualized, really not sure how the calculate this.
Hi Karthik,
You mean indices/indexes are nothing but dashboards ?
Dashboards? Not sure what you mean by this.
I mean to say does Indices/Indexes are MIS for respective stocks ?
No 🙂
Hi Karthik,
One more question I didn’t get what’s the difference between Indexes & Indices ? Please explain.
Also I am checking Indian Indices on money control no where I am seeing CNX IT , CNX I00 & CNX 500. Is it that CNX IT is other name of NIFTY IT , NIFTY 100 & NIFTY 500 ?
Indices is just a plural form for Index 🙂
Check this – http://www.moneycontrol.com/terminal/index_v1.php?index=9
Not understood the concept of free float market capitalization. In moneycontrol app it is given that market cap. of DLF Ltd. is 22,344.52 Cr and that of IOC is 169,155.45. In spite of larger market cap. IOC is not included in NIFTY 50 whereas DLF is included. Why???
Market Cap is defined as the total number of shares outstanding multiplied by share price. Free float Market Cap is defined as the number of free shares available in the market multiplied by share price.
In the article above, it’s written “Free float market capitalization is the product of total number of shares outstanding in the market, and the price of the stock.”
Yup, that’s right.
It won’t consider the face value of the stock to calculate the Market Cap?
MC = Number of shares * Price.
Hi Karthik,
Thanks for the Zerodha Varsity. It is remarcable that how you explained everything in a very simplified manner.
How promotor’s share holding is zero in a compony like ITC. What does that indicate?
Regards
Vinod
Thanks Vinod. Not sure about the ITC share holding pattern..but in case the promoter’s holding is low, then the company is run by a board.
Thank you Karthik
Welcome!
Does the weightage to Nifty for a particular company remains fixed or it can be changed in some conditions?
It changes based on the market capitalization of the company.
1)How does sensex differ from nifty?
2)Is index prepared on the basis of diffrent sectors?
3)what is bank nifty and how it differ from nifty 50?
4)what is sensex points and nifty points?
1) Sensex is from BSE, Nifty from NSE
2) Based on free float market capitalisation
3) They are two different indices
4) Points quantify to what extent the indices moves for a given timeframe.
Read the chapter fully.
How one can trade index?
What is derivative Index derivative
Yes, you can. You can trade by transacting in a index derivative. Read module 4 to understand this better.
You are superb!!! A lay man can also understand market after reading content of your website.
Thanks
Happy to know that, thanks Kalim 🙂
Happy learning!
” Usually the objective of market participants is to outperform the Index”
Isn’t the assumption here that you are trading in the selected or top 50 companies because they only decide the index, which is flawed?Won’t outperforming the index be of no relevance if the stocks you are trading in isn’t of the selected companies which essentially have no bearing on the index and hence gauging your performance according to the index be flawed?
You are free to use any benchmark you wish. For example I personally like to benchmark myself against the Juniorbees, as my portfolio is mainly small and mid cap stocks.
Can you explain what does trading index mean? In the next chapter there is a reference to buying index, how does that work?
You can do that via Futures and options, wherein you can buy Nifty futures. Check this module for more details – http://zerodha.com/varsity/module/futures-trading/
Thank you 🙂
Welcome!
Beautifully Written and Well Explained..
Cheers!
awsum page
Why index has more weightage to banking stocks??
Indices are based on free float market cap – so whichever companies fall under this methodology, they get included in the index.
Superb initiative to spread financial literacy in India.. your content is so good and easy to understand for everyone. I am from business management & MBA background but still this varsity thought me a lot compared to traditional MBA.
Happy to note that, Aradhya 🙂
Good luck and happy learning!
How can i find the weightage of a company in nse, bse website?
Check this – https://www.nseindia.com/products/content/equities/indices/indices.htm
how can i found low float stock …??????
You will have to scan the market for this.
sir,
thank you for this content,its very straight-forward.may god bless you!
Thanks for the kind words 🙂
what is the transaction charges for trading index
All charges explained here – https://zerodha.com/charges
The difference between the voting right share and non voting right share
Voting share gives you the right to vote in case of company related issue. A non-voting share does not.
After investing in Index. will it give all features like normal shares e.g. dividend, bouns for whichever company listed in Index.?
No, this won’t happen – you will not receive any corporate action benefits.
Sir even after spending few months on NSE website, I find it very hard to find information I need, from the website, like option data for last 6 months, time decay on daily basis and so on. Do you think there is any material to address this problem? Have you ever faced this problem or is it just me?
Well, the only information you get on NSE is OHLC of options, volumes, OI, and implied volatility. Everything else has to be derived from the B&S calculator – https://zerodha.com/tools/black-scholes/
How to find stocks that gap in the pre-market period on screener.smallcase?
You will have to check with Smallcase for that – http://help.smallcase.com/screener-help
Great article.
1 query – Now we see Infosys is listed in both BSE and NSE. Why is the price different in both. For instance at close of markets today, the share price of Infy in NSE is 991.15 whereas in BSE its 991.40.
Small variations are common, Anuraag.
A big Thank u sir, for giving a wonderful explanation about the stock exchange and sensex or nifty. i got it in a very handy way. now my question is how a VC valuates a company or startup nd invest money in them by getting some share ? can u help me plz ?
Check this – https://www.youtube.com/watch?v=32waPupaXGg&list=PLkxTRam6E2V_Kq5l-H4Xihh-nWgO6Z4d9&index=29
Thanks for the free and valuable knowledge sir… I have one quirey, for eg if I buy the share of xyz company through NSE for position trade can I sell those stock after few days in BSE? or if the answer is no than if buy mistake while placing sell order if I select bse instead of nse what would be the consequences?
Yes, you can buy from one exchange and sell it another exchange once the shares have been credited to your Demat Account, which is after T+2 Days.
You will not be able to do this for Intraday or BTST trades
Thanks Faisal…
but don’t mind Faisal… Karthik sir can u please confirm this to me…
In free float market capitalization , market capitalization= no of shares outstanding × stock price.
Here the stock price means the market price or face value..??
It refers to the market price of the share.
Hi , first all of thanks for Varsity as it simplify the concept of stock
My question is as in previous chapter market is based on fundamentals and news
so if we selecting some key company from particular sector and based on which we evaluate the performance (traffic) of all company in that sector. what if selected company has positive aspect so its growing and other one in same sector is surrounded with negative aspect. how will we evaluate
If the overall industry is not doing well, but if this specific company is doing good then it implies two things –
1) The company must be doing something drastically different/disruptive compared to its peers – if true, you should not hesitate to invest in such companies
2) Maybe the company is tinkering their books – need to be very careful while evaluating.
I bought a stock in NSE for long term. after some period can i sell that stock in BSE?
Yes, you can.
Sir,
how to invest index funds
Have you checked the direct MF platform from Zerodha called Coin – https://coin.zerodha.com/
Can one invest in industry specific indices?
Yes, you can choose to invest in a sector-focused fund like this one – https://coin.zerodha.com/funds/140513403.00206600/tata-india-pharma-healthcare-fund-direct-plan , although I think one is better off investing in a well-diversified MF as opposed to a sectoral fund.
PLEASE POST LATEST WEIGHTAGE OF NIFTY 50 INDEX.
Please check here – https://www.nseindia.com/products/content/equities/indices/indices.htm
by “Free float market capitalization is the product of total number of shares outstanding in the market, and the price of the stock”..is it the stocks available in the secondary market for buying and selling by the public or includes all the shares that are held by the Promoters, angel investors, VC’s & PE’s.??
Yes, it includes the shares that were tendered during the IPO and held by the public (including corporate bodies).
Hi, I am not able to find NIFTY BANK, NIFTY PVT BANK & NIFTY IT Sectoral Indices in my Kite. Any one know how to add them in my watch list?
Use the key word ‘Index’, when you search for an index. For example, ‘Nifty Index’, when you are looking for Nifty Spot.
Dear Karthik,
How much do you think the price weighted method of index construction using divisor and market weighted method of index construction by free-float, barometer the economy? Seems pseudo scientific and marketing the index gimmick.?on going deep into index constructions.
Well, to be honest, I’ve not given it a thought 🙂
But I think I like the market cap approach, this is assuming you place faith in Market’s price discovery mechanism.
good morning sir…
I am geting salary 40000 my MF investment is 12000.and i have done my insurance also..now i have opened zerodha demat…monthly how muchi should invest…like SIP or lumpsome investment i should choose.
Shishir, its best you speak to a financial consultant for this. I won’t be able to advise you on this.
Dear Karthik,
On a telescopic view of the global markets it shows Dow 30 follows a price weighted divisor method index and S&P 500 a 505 bunch of free float market capitalization index,And India”s Sensex 30 and Nifty 50 shifting to free float with out moving to broad numbered indexation as in S&P with 505 scrips.On a microscopic view of Indian barometer indices, Sensex and Nifty , promoter share of the State owned entities in the name of the President of India have a very less free float and many of the big boys have zero or very less promoter share and showed as public free float with majority QFI share for showing more weight age.So free float indexation, is it a true and equitable construction of economy or even of the stock market as a whole?Or a jugglery of numbers.
Its certainly not equitable but I think it is better than price-weighted. Ideally, it should be a fundamentally weighted index considering margins and CAGR of key metrics. Also, do take a look at this – http://www.ftse.com/products/downloads/FTSE_EDHEC_Risk_Efficient_Index_Series.pdf?32
Ftse a total return index seems more a robust construction with 101 constituents and I fully second your view.But my apprehension is how can promoter share be shown as zero to project a 100 percent freefloat ridiculing and belittling our country’s soverign holdings in the construction using the loopholes on construction methodology .Just peruse the CAGR from the date of shift to total freefloat of Nifty 50 stocks which includes the majority stateheld inclusions too.How the promoter and promoter group is structured and the insitutional and the non institutional public share holding is structured through QFIS.Throws a lot of insights to think about.Could you please let know the legality of this.
If this is true, then I’m quite surprised too, Najeeb. Maybe you should get in touch with them to hear their rational – http://www.niftyindices.com/contact-us
Dear Karthik,
Had discussed at length with the index construction team from the contact number you provided.They were asserting the construction is legitimate and ok but I don’t find it logical or equitable at all.Just peruse the shareholding pattern of Nifty50 stocks its market cap, its free float its weightage and looking into the CAGR of individual scrips since moving to free float and correlate all to understand it to yourself.I find the benchmark index not even barometer the stock market as a whole, forget about the economy.Just my view.
I do get your point, Najeeb. But here is the thing – whichever way you build the index, there is always a certain amount of bias. How do you account for that?
Reasonable bias is ok but it matters when bias goes beyond just and fair levels.Regulators may insist on a disclaimer clause for more transparency that bench mark index may not reflect a true barometer of the country’stock market which exchanges insist it is .Retail investors are made to believe to to a false impression that individual underlying stocks has a correlation with the benchmark indices which on perusal is not.
Maybe you should write to Moneylife and let them know your point of view 🙂
Sir – Basic Question..
Why do we have two different exchanges BSE & NSE why can’t we just have one ?
That will lead to monopoly of a single exchange 🙂
Is it harmful in this case ? As far as i’m aware stock exchanges are not like other business but is governed by govt right..
Competition is good, right, always good for the end client 🙂
Sir, is share outstanding or outstanding share same?
Yes, they are the same.
Sir,
How can I buy INDEX for long term?
There are a couple of options, Subbha
1) You can buy the Index ETF, look for Reliance ETF Nifty bees – https://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=NIFTYBEES&illiquid=0&smeFlag=0&itpFlag=0
2) You can buy an Index Fund – https://coin.zerodha.com/funds/14058076.00206600/reliance-index-fund-nifty-plan-direct-plan
I’d prefer the ETF.
Hi Sir,
These contents are very much informative.
Can I use them on my YouTube channel videos ?
I will use them for educational purpose only.
You and Zerodha will be given proper credits.
Hoping for optimistic response.
Sure, Arun. Thanks.
Dear Sir,
Greetings from a vivid appreciator.
I work in Sales at a Public company and I have insights in the Sales graph and revenue of it before it is made public.
Can I trade in the shares of the company? Does it qualify for inside trading?
Aayush, there are two things here –
1) This is insider information. Trading based on insider information is illegal.
2) Your company will also have prohibitions on trading, so you will be violating the company’s trading policy.
I’d suggest you refrain.
Sir, is Index funds are monthly investments or one time investment
You can choose to do a SIP in the index fund or a lump sum. It is really up to you and your investment requirement.
Thank You Sir.
I loved your site and your explanation style.
Thanks for the kind words, Siddhant. Happy learning.
how the values of sensex and nifty 50 are calculated.?
It is market driven, depends on how the stock making up the indices move on a daily basis.
suppose market is at 35000 (sensex)
how do we come to this number?
The index is formed by a set of underlying shares, when the shares trade in the market, the value changes, which in turn affects the index such as Sensex.
Hi sir,
Please let me know where can we find the updated list where in how much weight is given to which stock and also how often are these stocks replaced
You can find that here, Brain – http://www.niftyindices.com/
Can I get this downloaded in pdf form for offline reading?! I mean, chrome is not the better place for long reading, I say.
Yes, you can. The link to download is available at the end of the chapter.
Hi Karthik
It might be dumb question but it is a question after all.
What is the basic difference between NSE and BSE what was the purpose of creating two different stock exchange.
The regulators never wanted to give a monopoly to one single exchange. Essentially these are two different exchanges which offer similar products. Think about it Big Bazaar and DMART, same groceries, different experience.
Thank you Karthik..
Welcome!
Hi Karthik,
You are an ocean in the knowledge now I need one cup of yours.
How to evaluate a share price is overvalued or undervalued with the current market. Or to calculate the fair market value of shares.
I have gone through different formulas and methods but still not get clear.
Naveen, those are big words 🙂
Everything about valuations/fair price etc is discussed in detail here – https://zerodha.com/varsity/module/fundamental-analysis/
Sir,
Does index trading means buying a collection of stock from indices such as Bank Nifty and CNX IT?
The index itself is a collection of stocks, so when you buy the trade the index you are essentially buying or selling the entire set of stocks in 1 go. This is referred to as ‘Index trading’.
Thank you. The information provided by you is simple and easy to learn.
Glad you liked the content 🙂
Excellent work karthik and zerodha team, content is cool and equally comments section as well, loads of information.
After IPO, when ABC company hits secondary market, say there are 100 shares to hit the secondary market, will it be like 50 in NSE and 50 shares in BSE?
Glad you liked the content 🙂
That really depends on how many exchanges they want to list in.
what are these nse 50 or nse 100 (etc.) indices and their differences?
These are just different indices, Soubhik.
Suppose I am holding future of TCS and on expiry take delivery then I will get 1000 TCS stocks. In the same way if I take delivery of nifty then what will I get ?
how can we buy bank nifty index so that I can make a covered call write on bank nifty . Currently I do not see but and sell option on for bank nifty as I see for stocks .
Covered call in indices is a bit tricky as the underlying itself is an index. At best, you can buy futures and sell call options.
Hi Karthik,
I must say that this content that Zerodha has provided here is really the best. Fortunately, the day I thought that I need to learn more about the market, I came across this portal over Medium by TradeBrains founder. The simple and easily understandable language that is used to teach is excellent.
We can see the commitment of Varsity by noticing that the comments section expands/covers far greater space than the content itself. Zerodha is really justifying the saying the we learn by asking questions and we need to ask more.
In coming days, I am going to ask lots and lots of them.
Once again, thanks for educating us about our economy.
-Aakash Singh
Welcome aboard, Aakash! Hope you find learning on Zerodha Varsity fun and enriching. Feel free to ask all your questions, hopefully, we all get to learn a thing or two 🙂
Sir..You have strengthened my financial knowledge to some extent..
My doubt is in MCX on what basis the number of contracts are assigned and who governs it.Is MCX governed by any ministry ,if yes then it comes under which ministry?
Yes, the commodities market and MCX is regulated by Forward Market Commission of India – http://fmc.gov.in/
Is it possible to get the weightage constituency of all stocks listed in NIFTY 100 INDEX ?
Yes, Reshma. Check this – https://www.niftyindices.com/indices/equity/broad-based-indices/nifty-100
Hi Karthik! I recently started learning about investing and stock markets in general from zerodha varisty and it’s been good so far. I just have a suggestion (or maybe a request), can we give short quiz/tests through the website instead of app? I’ve been learning from the website but couldn’t give the test there. Please look into this if possible. Thanks 🙂
Nitesh, thanks and I’m glad you are learning from it 🙂
For now the quiz and test is a core feature of the app. Will try and see if we can have the same thing for the web. Thanks for the suggestion.
Dear Sir,
I am bit confused about these so called market index such as nifty 50 and banknifty.
My understanding is they are kind of derivates of underlying stock prices. So whenever there is change in spot price of stock these index should change but what I a failed to understand is sometimes within span of an hour they vary about 100 points, eg nifty from 11500 to 11600. Though there is no major events happening in that 1 hour so as to alter the stock prices of 50 companies that constitute nifty 50 dramatically. It seems to me that Rather than equity prices driving nifty price it’s other way round nifty drives equity price by fluctuating dramatically 100 points in a span of an hour thought nothing much changed in that time period that affected systemic or non systemic risks in that time period. This happens more so in the beginning or at the end of the market timings most of the days. Though the volatility and volume of buyers sellers may play a role here, but still I am lost to understand this wild swing in index. Because of this all the technical analysis and fundamental analysis you apply goes into drains.
I would be grateful to you if you could explain about intraday wild swings in nifty and banknifty without any strong reason.
Thanks
Kumar, take Nifty for example – there are 50 individual companies that make up for the Nifty 50 index. Now, not all these companies have equal weightage to the indices. In fact, you can check the individual weights here – https://www.niftyindices.com/.
Each of these stocks trades on a regular basis, and the movement in each of these stocks have an impact on the index, hence as a result, the index too moves.
Sir
What’s profit booking and why the indices such as Nifty and Bank nifty fall dramatically (within seconds to a minute) during profit booking.
Thanks
Profit booking is a term used to indicate that the traders are closing their position to book some profits. For example, if a trader is long and wants to book profit, then he has to sell his position. Likewise, if a trader is short and wants to book a profit, then he has to buy the position back.
Thanks you sir,
Please answer my second question does profit booking by large number of participants leads to sudden fall in index such as nifty and bank nifty.
Thanks
This is true when a large number of traders have built long positions and have decided to unwind their position.
Sir,
For checking weightage i usually follow Economic times. There are many brokers who gives weightage of index stocks but i found differences in each of them.
Is it possible that zerodha will provide real time index weightage for their customer???
Like Nifty, Sensex, BankNIfty NiftyIT etc
It is quite helpful for trader, and we will get this information quickly while trading without going anywhere else.
Thanks
Rakesh, the weight of the stock constituents on the index?
Can I directly invest in SENSEX or NIFTY 50 ?
You can invest via Index ETFs. Check this for Nifty ETFs – https://zerodha.com/nifty-etf
what actually the index points to in stock market?
Anmol, have explained the same in the chapter 🙂
what are points of BSE or NSE signify? Are these the ones called index?
Thanks you so much. With these article it is very easy to understand stock market
Happy learning, Kunal!
Shares outstanding are all the shares of a corporation or financial asset that have been authorized, issued and purchased by investors and are held by them. The person who holds the shares has rights and represents ownership in the corporation
Yes, thats right.
Hi,
I can buy shares on via KITE terminal & similarly i have bought some mutual funds on COIN platform of Zerodha. I want to know that how to buy Index funds or ETFs using Zerodha? Even i am not able to search ETFs or Index fund neither on KITE terminal nor on COIN terminal.
The Index ETFs are exchange-listed, so you will have to look for it on Kite. Index funds is a mutual fund, so you’ll have to look for it in Coin.
How much does BSE pay S&P every year as licencing fees?
No idea 🙂
However, BSE is a listed company. You should get this info in their annual report.
Hi sir, took this screen shot of NIFTY Index (https://imgur.com/a/y0dk17e) today night, why do both value differs? Aren’t both are the closing price?
Similarly all the equity closing value also differs in chart (https://imgur.com/a/YhDuwrX), why it is so?
Thanks!
Ah, you must be seeing the last traded price. EOD, upon expiry both values converge.
Hi Kartik,
First of all thank you for providing an opportunity for all of us to learn. I have two questions
1. The stock price of each particular stock is different in both the exchanges. I want to understand the reason why is it not possible to make clear profits by buying from one index and selling on the other? Is it because of the taxes and other transaction cost?
2. Can we buy from one index and sell on another?
1) You can, but most often the difference does not last long
2) Not sure what you mean by this.
Hello Sir,
From last few days I have closely monitored NIFTY and DOW. It can be easily seen that NIFTY is blindly following DOW. I think in current situation the economy condition is not such that 10% increase in a single week is possible. I think, one who is going to loose her job, at least will not go out to purchase a maruti. But still automobile sector is doing good. These all gives a feeling that investing in current situation is just like building a house of cards. Please share your view in this regard and kindly in detail. Sir, one more request please explain or suggest a book on trading in recession.
Markets are forward-looking, Bivash. So it anticipates the economic situation going forward and reacts to it today. Trading is the same, recession or not, does not matter.
I’ll be back when i become big.
Please do 🙂
Hi Karthik,
I wanted to ask that since index depends upon the free float market capitalization , which fluctuates daily because of share price, so does this mean that everyday weightage also changes? I learnt that nifty is reviewed atleast twice a year, but is the weightage daily updated (if it changes daily).
It changes, but not too drastically.
[…] 7. The Stock Markets Index […]
What do you mean by Shares that are outstanding?
The shares that are outstanding in the market, that’s what I mean.
Where can I find the list on companies Zerodha supports in trading for long term
That is basically every company listed on both NSE and BSE 🙂
Makes interesting reading. The Q and A part is enlightening.
Happy reading!
I have recently entered in to stock market trading , Accidentally i see this URL looks very informative , i have one suggestion , Is it possible to include a short Quiz after each module to check the reader understanding ? like the the takeaway ..
Anyway your article\blog is worth reading ..
Rajesh, do download the Varsity App. We have included the quiz in the app.
Hi Kartik!
I had a doubt regarding the stock price and the share price. stock is the cumulative of the shares and the share is an individual unit. Am I right? So while calculating the free float capitalization we multiply the outstanding shares with stock the stock price. So which price do we actually consider here? share price or the stock price?
Ah no. Both these terms are used interchangeably.
Also, the weightage is decided based on the no. of outstanding shares. so does it mean that the company which has more tradeable shares in the market will have more weightage, considering the share price is also high.
How does one convert the free-float market capitalization into market weightage percentage?
Sorry, I didn’t get your query. Can you add more context?
can u please tell when will new user registration begin?
User registration for what, Nishita?
sir you mentioned ITC has cigarettes industry…but ITC is famous for fmcg product ?
Yes Amar, they have a portfolio of investments.
Sir,
When company decides to go for IPO, it has to fulfill the condition of Index.
My question is,
1) Does the company needs to fulfill the criteria of BSE & NSE seperately to be listed on both?
2) The number of shares which the company is giving for IPO should be seperate for both BSE & NSE. Suppose ABC Company is giving
100000 shares for IPO on NSE & 80000 shares on bse for IPO?
Is it like that or something else?
1) Yes. You can actually look at the listing criteria mentioned on both the exchanges, its available on the website
2) I’m really not sure about this. Have to check this myself 🙂
Hello,
Few queries-
1. Suppose as per above chart, DLF is the 50th company for Nifty, and let’s say ABC is a new company which met all the criteria eligible for Nifty and has more free float market cap than DLF. In that case DLF will be replaced by ABC? If no, why?
2. As per above question from Kalpana, regarding division of shares to NSE and BSE, were you able to get the answer?
3. As per you, which is best exchange, NSE or BSE? and why?
1) Yes, that’s right
2) Sorry, which division are we talking about here? I’ve lost the context
3) For Eq trading, depends on where the price is better. For F&O, its NSE 🙂
I just want to thank you Karthik. I’ve always wanted to learn more about indices, and I’ve understood it perfectly here. Thank you for taking out the time to write these wonderful lessons. I’m grateful.
Thanks for the kind words, Vivek! Happy to note that the module is helping 🙂
Although it’s difficult to outperform the market and simple to underperform it, instead of buying index funds (which I’m not sure from where, and from which company; I’m now only looking at mere stocks, can you help?), can’t we outperform the market thorough ‘put’ options and other things of that sort? (I have understood a bit about how to make returns through premiums in options; will refine it when I get to that section.) It’s possible to make 12% in less than 2 months, considering everything goes well. What do you think?
Its a hard question 🙂
Technically yes, it is possible to outperform. But its really not easy 🙂 12% is 2 months is a dream. Yes, you can make it once in a way but to make 12% consistently in every 2 months will take you close to god mode in the stock market 🙂
hey i had an ad
Does angle investor or VC’share or promote’share included in outstanding share? or Only issued share to the public through IPO is counted as outstanding share?
Yes, it is included.
Hi,
Why are there more companies -5000 in the BSE and only 2000 in NSE ? Is BSE better than NSE ? How does one decide which index to trade in ?
BSE is a much older exchange compared to NSE.
Q1. how free floated market cap figures get converted into weightage (%)?
Q2. if ITC has the highest weightage, does that mean ITC has the highest no. of outstanding shares in the market to trade?
please help me explaining this term
is it a negative way if it is at the highest ?
When add foriegn Stocks,just like: cocaCola,apple,tesla,fb
Not anytime soon, Naveen.
Why SENSEX is More in Focus Compared to NIFTY50?
i mean whenever major news came into market, News Channels say, SENSEX Drop/Up as many %
due to US eletion SENSEX beats past Records etc
Sensex has been around for many more years compared to Nifty, hence Sensex has wider recognition.
how can i get the knowledge of stock market
Please do read up on all the chapters here 🙂
how can i will get knowledge of share market
Can a Indian company get listed on foreign stock exchange? If yes then can there be difference in the price on these two exchange?
Yes, and Yes.
Why is trading sector indices like CNXIT, CNXAUTO, etc not possible?
Contracts arent available on these yet, the exchanges have to figure this out.
Is there a way to pull market capitalization of all NSE stocks?
You can get that on screener or Tijori Finance.