Reviewed by Sep 30, 2020| Updated on
Constituents are stocks of companies that are part of market indices, such as Nifty 50 and Sensex. It is a member or a component of the market index. The sum of the stocks of all members is used to determine the overall value of a market index.
Every member or constituent will have to meet some prerequisites concerning the market capitalisation, exposure to the market, and liquidity prior to being a part of a market index.
Breaking Down Constituents
The BSE Sensex is a popular index, which is comprised of the 30 largest stocks listed on the Bombay Stock Exchange, the oldest stock exchange in Asia. The SBE Sensex is considered as a benchmark index of India.
Another popular Indian index is the NSE Nifty 50. It is made up of the 50 largest stocks being traded on the National Stock Exchange, the largest stock exchange in India. The NSE Nifty is also considered as a benchmark of India.
Importance of Constituents
Market indices are used in a lot of functions, such as keep track of the performance of stocks being traded in a particular market or gauging the development of a specific sector. Moreover, there are mutual funds whose asset allocation is exactly the same as a particular index and try to emulate the performance of that index.
By being a constituent of a particular index, that company’s stocks will go onto receive the advantage of enhanced exposure and credibility of being a constituent. This may also give the share price a booster as several passively managed funds try to emulate the performance of a market index.
When a firm becomes a constituent member of an index, then mutual funds tracking that index should buy the shares of the company. After being a constituent of a market index, the company should mandatorily follow all the guidelines, and if not, it would be replaced.
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