Broad Market Indices

They provide a consolidated measure of overall equity market performance rather than focusing on a specific industry or theme. These indices aggregate stock prices across multiple companies, offering a high-level representation of market-wide activity over time.

A broad market index measures the performance of a large and diverse group of listed companies. It typically includes stocks from multiple industries and across large-, mid-, and small-capitalisation segments.

Most broad indices are constructed using methodologies such as:

• Free-float market capitalisation weighting

• Full market capitalisation weighting

• Equal weighting

The methodology determines how much influence each stock has on index movement. By covering companies of varying sizes and sectors, broad market indices reflect overall market participation and general price trends across the equity system.

Broad indices exist in both Indian and international markets and are widely referenced in financial reporting.

India

• Nifty 500 – Tracks approximately 500 companies listed on the National Stock Exchange, spanning large-, mid-, and small-cap segments based on free-float market capitalisation.
  

• BSE AllCap – Covers companies across large, mid, small, and micro-cap categories listed on BSE.
  

• Nifty 50 – Represents 50 large-cap companies and serves as a core benchmark for India’s equity market.
  

• BSE Sensex – Comprises 30 large, well-established companies listed on BSE, reflecting movements in leading Indian stocks.
   

Global

• S&P 500 (United States) – Includes 500 large-cap U.S. companies and is widely referenced as a broad indicator of the U.S. equity market.
  

• FTSE All-Share (United Kingdom) – Represents most companies listed on the London Stock Exchange, covering large, mid, and small-cap stocks.
  

• NASDAQ Composite (United States) – Tracks all securities listed on the Nasdaq exchange, with significant representation from technology and growth-oriented companies.
  

• MSCI World Index – Covers large and mid-cap companies across multiple developed markets, offering a global equity market reference.
   

These indices differ in coverage and weighting but collectively illustrate how broad benchmarks represent aggregate equity market movement.

A broad market index aggregates the weighted price movements of a large group of listed companies to reflect overall equity market behaviour. Index movement is driven by changes in constituent stock prices, based on the weighting methodology applied.

Market Representation

Broad market indices include companies across multiple industries and market-capitalisation segments, providing coverage of a substantial portion of the listed equity universe rather than a single sector or theme.

Diversification Benefits

Because index composition spans many constituents, price changes in individual stocks are distributed across the index, reducing the influence of any single company on overall movement.

Benchmarking Role

Broad market indices are commonly used in financial reporting as reference benchmarks for comparing portfolio and fund performance against broader market trends.

Investment Products

Several financial products, including index mutual funds and exchange-traded funds (ETFs), are structured to mirror broad market indices by maintaining similar constituent holdings and weightings.

Passive Management

Broad market indices also serve as the underlying reference for passive portfolio strategies, where investment portfolios are designed to follow index composition rather than rely on active stock selection.

Many broad indices in India use a free-float market capitalisation-weighted approach.

Under this method:

1. Market capitalisation is calculated
   Total outstanding shares × current market price.
   

2. Free-float factor is applied
   Shares not available for public trading (such as promoter or government holdings) are excluded.
   

3. Free-float market capitalisation is derived
   Market capitalisation × free-float factor.
   

4. Index value is computed
   The total free-float market capitalisation of all constituents is divided by a base market value and multiplied by a base index figure set at inception.
    

This structure ensures that index weight reflects actively tradable shares rather than total issued capital.

Broad indices differ primarily in weighting methodology:

Cap-Weighted Indices

Stocks are weighted according to market capitalisation. Larger companies exert greater influence on index movement.

Equal-Weighted Indices

Each stock carries the same weight, regardless of company size.

Free-Float Weighted Indices

Weights are based only on publicly tradable shares, aligning index movement more closely with actual liquidity.

Broad market indices serve several descriptive and comparative functions:

• Benchmarking – Portfolio and fund performance are often compared against broad indices.
  

• Market sentiment reference – Index direction is observed alongside measures such as advance-decline ratio to assess participation.
  

• Structural base for passive products – Many index funds and ETFs replicate broad indices.
  

• Market composition context – They illustrate how exposure is distributed across sectors and company sizes within the equity market.

Advantages

• Comprehensive representation – Reflect performance across multiple sectors and capitalisation segments.
  

• Distributed price impact – Inclusion of many constituents reduces reliance on a single stock or sector compared to narrow indices.
  

• Standardised comparison reference – Commonly used in research and reporting for performance evaluation.
   

Limitations

• Market-cap concentration – In capitalisation-weighted indices, large companies can dominate index movement.
  

• Market-linked declines – Index levels fall during broader economic slowdowns or volatility.
  

• Periodic rebalancing – Composition changes occur at defined intervals rather than continuously.
  

• Uniform inclusion criteria – Constituents are included based on predefined eligibility rules, not qualitative assessment.

Broad market indices represent aggregate price movement across a wide set of listed companies. By covering multiple sectors and capitalisation segments, they provide a consolidated view of overall equity market behaviour and serve as reference benchmarks within the financial system.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.