Part 26 Stock Market Indices Explained: History, Structure, and Fun Facts
Part 26 Stock Market Indices Explained: History, Structure, and Fun Facts
An index (plural: indices or indexes) in the context of finance, economics, or data refers to a statistical measure that tracks the performance or value of a specific group of items, such as stocks, prices, or other economic indicators.
Indices are widely used to gauge the health of markets, economies, or specific sectors.
What is an Index?
Definition:
An index is a numerical representation of the performance of a group of assets or indicators, often expressed as a single value that changes over time.
It’s typically calculated using a weighted average of the components (e.g., stocks, bonds, or commodities).
What is an Indian Stock Market Index?
An index in the context of the Indian stock market is a statistical measure that tracks the performance of a select group of stocks listed on a stock exchange.
It serves as a barometer for the overall health of the market or specific sectors, reflecting investor sentiment, economic trends, and company performance.
Key Indices:
S&P BSE Sensex:
Tracks 30 financially sound and well-established companies listed on the Bombay Stock Exchange (BSE).
Nifty 50:
Tracks 50 of the largest and most liquid companies listed on the National Stock Exchange (NSE).
Benchmarking: Indices provide a standard to measure the performance of investment portfolios, mutual funds, or individual stocks.
Market Insight: They reflect market trends, investor confidence, and economic conditions in India.
Investment Products: Serve as the basis for financial products like exchange-traded funds (ETFs), index funds, and derivatives.
Economic Indicator: Offer insights into the health of the Indian economy, influencing policy and investment decisions.
Global Comparison:
Allow investors to compare Indian market performance with global markets.
Key Facts About Indian Stock Market Indices
Sensex:
Launched on January 1, 1986, by the BSE.
Base year: 1978–79, with a base value of 100.
Comprises 30 companies across various sectors, selected based on market capitalization, liquidity, and financial stability.
Free-float market-cap weighted, meaning only shares available for trading are considered.
As of July 8, 2025, the Sensex closed at 83,713 points, up 0.32% from the previous session.
Nifty 50:
Launched on April 22, 1996, by the NSE.
Base period: November 3, 1995, with a base value of 1,000.
Represents 50 large-cap companies across 14 sectors, weighted by free-float market capitalization (since June 26, 2009).
India’s stock market is the fourth-largest globally by market capitalization, surpassing Hong Kong in January 2024 ($4.33 trillion vs. $4.29 trillion).
BSE is the world’s largest stock exchange by the number of listed companies (over 5,500).
NSE is one of the largest exchanges globally by trading volume, known for pioneering electronic trading in India.
Regulation: The Securities and Exchange Board of India (SEBI), established in 1988 and granted statutory powers in 1992, ensures transparency, fairness, and investor protection.
Purpose:
Indices provide a simplified way to track trends, compare performance, or benchmark investments.
For example, a stock market index like the S&P 500 tracks the performance of 500 major U.S. companies.
Types:
Financial Indices: Track stocks (e.g., Dow Jones Industrial Average), bonds, or other assets.
Economic Indices:
Measure economic activity, like the Consumer Price Index (CPI) for inflation.
Other Indices:
Used in fields like mathematics, databases, or statistics (e.g., database indexing for faster searches).
Calculation Methods:
Price-Weighted: Based on the price of components (e.g., Dow Jones).
Market-Cap Weighted:
Based on the market value of components (e.g., S&P 500).
Equal-Weighted:
All components have equal influence.
Uses:Benchmarking for investment portfolios.
Basis for financial products like ETFs, which track indices.
Economic analysis and forecasting.
Fun Facts About Indian Stock Market Indices
Sachin Tendulkar Effect:
A study by Monash University economists found that the Nifty 50 index dropped by an average of 0.231% the day after India lost a cricket match, with losses 20% higher when Sachin Tendulkar was on the losing side.
October Jinx:
Globally, October is considered a jinxed month for stock markets, with major crashes in 1929 and 1987 (Dow Jones fell 25% and 22%, respectively).
Indian markets have also faced significant October volatility.
MRF’s Costly Share:
MRF (Madras Rubber Factory) holds the record for India’s costliest share, priced at ₹69,290 per share as of October 2021.
TCS vs. Karachi Stock Exchange:
The market capitalization of Tata Consultancy Services (TCS) alone (₹15,87,562 crore as of July 2024) exceeds the entire Karachi Stock Exchange’s market cap ($65 billion).
BSE’s Global Rank:
The BSE, with over 5,500 listed companies, is the largest stock exchange globally by number of listings, outranking even the New York Stock Exchange.
Pirate Exchange Connection:
While not directly related to Indian indices, a quirky global fact is the existence of a “pirate stock exchange” in Somalia (est. 2009), where investors fund pirate activities—a stark contrast to India’s regulated markets
Key Facts About IndicesStandardization:
Indices are standardized to a base value (e.g., 100 or 1,000) at a specific starting date for easy comparison.
Dynamic Nature:
Components of an index (e.g., companies in a stock index) may change due to mergers, bankruptcies, or criteria updates.
Global Reach: Major indices like the S&P 500 (U.S.), FTSE 100 (UK), or Nikkei 225 (Japan) are tracked worldwide.
ETFs and Indices:
Exchange-traded funds (ETFs) are investment vehicles that aim to replicate the performance of an index (e.g., SPY tracks the S&P 500).
Limitations:
Indices may not reflect the entire market (e.g., the Dow only tracks 30 companies).
Weighting methods can skew performance (e.g., market-cap weighting emphasizes larger firms).
They don’t account for dividends unless specified (e.g., total return indices include dividends).
History of Indices
Early Concepts:
The idea of indices predates financial markets, with roots in statistical measures for economic data.
For example, price indices for goods were used in the 18th century to track inflation.
Financial Indices:
The modern stock market index emerged in the late 19th century as markets grew and investors needed tools to assess performance.
Evolution:
Early indices were simple averages of stock prices.
Over time, indices became more sophisticated, incorporating market-cap weighting and broader coverage.
The rise of computers in the 20th century enabled real-time index calculations and the creation of complex indices.
Modern Era:
Indices now cover virtually every asset class (stocks, bonds, commodities, real estate) and niche sectors (e.g., ESG indices for sustainable investments).
The growth of passive investing and ETFs has made indices central to global finance.
The First IndexName:
The Dow Jones Industrial Average (DJIA) is widely recognized as the first modern stock market index.
Creator:
Charles Dow, co-founder of Dow Jones & Company and editor of The Wall Street prominenJournal.
Launch Date: May 26, 1896.
Details:Initially included 12 industrial companies (e.g., General Electric, American Cotton Oil).
Calculated as a simple average of stock prices (price-weighted).
Base value was not explicitly set but started at 40.94 points.
Purpose:
To provide a snapshot of the U.S. industrial sector’s performance, reflecting the economy’s shift toward industrialization.
Evolution:
Expanded to 30 companies by 1928.
General Electric was the only original component still in the index until 2018.
Remains one of the most-watched indices globally, though it’s less representative than broader indices like the S&P 500.
Significance:
The DJIA paved the way for other indices and established the concept of tracking market performance through a standardized measure.
The S&P 500 (launched in 1957, but data back to 1923) became a broader alternative to the DJIA.
The FTSE 100 (1984) and Nikkei 225 (1950) followed as global markets developed their own benchmarks.
Economic Indices:
Beyond stock indices, the Consumer Price Index (CPI), developed in the early 20th century, was among the first economic indices to measure inflation systematically.
Modern Trends: Indices now include thematic ones (e.g., AI, clean energy) and are increasingly used for algorithmic trading and passive investing.
History of Indian Stock Market Indices -
The Indian stock market’s history is intertwined with the evolution of its exchanges (BSE and NSE) and the broader economic landscape.
Below is a timeline of key milestones related to Indian indices and the stock market:
1830s: Informal stock trading begins in Mumbai under a banyan tree, focusing on bank and cotton press shares.
1850: The Companies Act introduces the concept of limited liability, boosting interest in corporate securities.
1875: The Bombay Stock Exchange (BSE) is established as the “Native Share and Stock Brokers’ Association,” Asia’s oldest stock exchange.
1964: Unit Trust of India (UTI) launches India’s first mutual fund scheme, US 64, raising ₹6,400 crore by 1988, popularizing equity investment.
1977: Reliance Industries’ IPO, led by Dhirubhai Ambani, sparks a “cult of equity” among retail investors.
1986: BSE launches the S&P BSE Sensex (Sensitivity Index) on January 1, with a base value of 100 (1978–79), tracking 30 major companies.
1988: SEBI is established to regulate markets, though it gains statutory powers in 1992.
1991: Economic liberalization under PM Narasimha Rao and Finance Minister Manmohan Singh opens markets to foreign institutional investors (FIIs), boosting liquidity.
1992:The National Stock Exchange (NSE) is incorporated, introducing electronic trading and enhancing transparency.
Harshad Mehta scam causes a 12.77% Sensex drop, exposing market vulnerabilities and prompting SEBI reforms.
1993: NSE is recognized as a stock exchange by SEBI.
1994:NSE launches the Nifty 50 index on April 22, with a base value of 1,000 (November 3, 1995), tracking 50 large-cap companies.
NSE introduces fully automated, screen-based trading, revolutionizing the market.
2000: NSE surpasses BSE in market capitalization, driven by its electronic trading system and broader membership.
2004: Sensex falls 11.14% (565 points) on May 17 due to political uncertainty after the National Democratic Alliance’s election defeat
2008:Global financial crisis triggers a Sensex drop of 1,408 points on January 21 (“Black Monday”).
BSE launches the S&P BSE IPO index to track newly listed companies.
2014: BSE achieves a market cap of ₹100 lakh crore, reflecting India’s growing financial clout.
2016: Sensex drops 1,689 points on November 9 due to India’s demonetization policy and global factors like the U.S. election.
2020:COVID-19 pandemic causes a 13.15% Sensex drop on March 23, the largest single-day fall in its history.
Sensex falls from 42,273 to 28,288 points within a week, compounded by the Yes Bank crisis.
2021: Retail investor participation surges to 7 crore registered users, fueled by digital platforms and post-COVID recovery.
2024:India’s stock market surpasses Hong Kong’s, becoming the fourth-largest globally ($4.33 trillion).
TCS’s market cap (₹15,87,562 crore) exceeds the entire Karachi Stock Exchange.
2025:Sensex reaches 83,713 points on July 8, up 4.18% year-over-year.
A major market crash occurs in January–February, with Sensex dropping over 1,000 points on February 28 due to global trade tensions, U.S. economic slowdown, and FII withdrawals.
Nifty Financial Services Index rises 9% in March but remains volatile
Popular Global Indices
