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Ryan Martis
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« on: July 11, 2009, 02:21:49 AM » |
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In recent months, the Sensex has created headline after headline as it has marched seemingly unstoppable from 15,000 to 16,000 to 19,000 and, for a brief moment, 20,000.
Even people who don't follow stock markets closely may have a pretty good idea of the Sensex value. But what exactly is the Sensex? And what can indices like the Sensex and Nifty tell you about stock market movements?
What is a stock-market index?
A stock-market index is simply a convenient summary of market prices. There are thousands of stocks whose prices fluctuate up and down every day.
An index helps make sense of this chaos and gives you a single number which tells you how well the market is performing compared with earlier periods. The basic idea is to select a small number of stocks which are considered representative and important and calculate the index based on the prices of those stocks.
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Ryan Martis
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« Reply #1 on: July 11, 2009, 02:22:37 AM » |
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These are the two most popular indices for Indian stock markets and are produced by the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) respectively.
The Sensex which was first calculated in 1986 is based on the market capitalisation (share price times the number of shares outstanding) of 30 important stocks. The actual stocks have changed over the years along with the Indian economy but in general the Sensex represents the stock prices of the largest and most important companies from a variety of sectors. It is updated every 15 seconds during trading hours.
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Ryan Martis
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« Reply #2 on: July 11, 2009, 02:23:21 AM » |
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Yes, it is important to understand that the Sensex and the Nifty are just the most popular of many different indices. Both the BSE and the NSE produce several other indices which cover smaller firms and individual sectors.
For example the S&P CNX 500 is a broad-based index which covers 500 firms and therefore gives a broader picture of the stock market as a whole than narrower measures like the Nifty. The BSE-500 is another broad index produced by the BSE. These two indices cover more than 90 per cent of the market capitalisation of all the firms in their respective stock exchanges.
Both exchanges also produce sector-specific indices. For example you have the BSE Auto Index, BSE IT Index, CNX Pharma Index, CNX Bank Index and so on. Both exchanges also have indices which focus on mid-cap and small-cap firms: BSE Mid-Cap, BSE Small-Cap, CNX Midcap etc.
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Ryan Martis
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« Reply #3 on: July 11, 2009, 02:23:53 AM » |
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In addition to their general role as a summary of market conditions, indices are of great use to the financial sector.
They are used to benchmark mutual fund performance; ie to see how a particular fund is performing relative to the broader market.
They are used in creating new financial products called index derivatives (financial products whose value is derived from the level of a particular index).
Also they are used by index funds which invest passively in the stocks of a particular index instead of trading actively.
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Ryan Martis
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« Reply #4 on: July 11, 2009, 02:24:24 AM » |
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The bottom line is that the Sensex and Nifty are good starting points but investors need to look beyond them when it comes to understanding market movements.
For example it's possible that when the Sensex is booming, mid-cap firms may be lagging behind.
Or the booming Sensex may be driven by just one particular sector like capital goods while IT may be doing quite poorly. To get a full picture of what's happening, you need to look at a combination of indices.
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