What is Sensex & Nifty | सेंसेक्स और निफ्टी क्या है

 

Understanding Indices:

If you are asked what is the gender equality ratio in your state? You will refer an indices and give an overview by male-female ratio in your state or country.

Similarly, 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 1600 listed companies on the National Stock Exchange. It would be clumsy to check each and 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.

So every time someone asks you how the markets are doing, you would just check the general trend of these selected stocks and then give an answer. These companies that you have identified collectively make up the stock market index!

Stock Market Indices in India:

There are two main market indices in India. The S&P BSE Sensex representing the Bombay stock exchange and 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. Nifty consists of the largest and most frequently traded stocks within the National Stock Exchange.

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 negative.

click here for Nifty50 & sensex comapnies list(june 2020).

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.

For example the Nifty value on the 1^st of January 2020 was 11900 and the value as of 24^th June 2020 was 10450. This represents a change of 1450 points in the index of a 12.18% decrease. This simply means that during the time period under consideration, the markets have gone down quite significantly indicating a negative 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 25^th June 2020 was at 10520 but an hour later it moves to 10506. A drop of 14 points during this period indicates that the market participants are not too enthusiastic.

 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 which collectively represents the state of the economy. 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 Reliance Limited has 14% weightage on the Nifty 50 index, then it is as good as saying that the 14% of Nifty’s movement can be attributed to Reliance.

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 method called free-float market capitalization. The weights are assigned based on the free-float market capitalization of the company, 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 price of the stock.

For example company, ABC has a total of 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.

Sector specific indices

While the Sensex and Nifty represent the broader markets there are certain indices that represents 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 behavior of all the IT stocks in the stock markets. Both BSE and NSE have sector specific indexes.  The construction and maintenance of these indices is similar to the other major indices.

Major factors that affect the performance of indices:

Stock markets are considered to reflect the state of the economy. Whenever there is a slowdown in the economy, there is sluggishness in the market too.

·         a. Change in interest rate:

When the interest rates are increased, the borrowing cost for companies increases. To compensate this, the companies cut their expenses in many ways. This affects the company’s earnings and as a result the stock markets fall.

·         b. Inflation rate:

When there is high inflation, investors do not have surplus amount that can be used for investment purposes. Companies also suffer as they should pass on the higher input costs to the consumers.

c. Global economy:

·         A recession in global economy will affect the stock markets. Other factors that impact the stock market are crude oil prices, rupee depreciation, political instability, etc.