We all know that a body moves when an external force acts on it. Similarly, there are internal & external economic factors (forces) acting on an internal market (body) from all directions, resulting in market trends. These trends are either ascending or descending in nature. And to help you distinguish between the two trends, there’s a metric called the stock market index.
A stock index combines various stocks to create an aggregate value that investors can use to measure the performance of a market (eg, the Bombay Stock Exchange and the National Stock Exchange) or a sector ( eg, energy, infrastructure, real estate). In the Indian context, there are two main stock indices used to assess the markets: sensex and witty. Indian investors can track changes in the values of these indices over time and use them as a benchmark to compare their own portfolio returns.
Reading: How to read the stock market index
Now when investors talk about the market, they mean that there are stock indices from various sectors of the market that don’t always move in tandem. because if they did, there would be no reason to have multiple stock indices. Therefore, by understanding how stock indices are created and how they differ, you will be able to understand the daily movements in the Indian market.
s&p bse sensex (also called bse 30 or sensex)
sensex (or sensitive index) was created in 1986 and is the oldest stock index for stocks. It is made up of shares of 30 well-established and financially strong companies listed on the BSE. These companies represent various industrial sectors of the Indian economy.
sensex has adopted the market capitalization weighted method in which weights are allocated according to company size. the larger the size, the greater the weight.
Now, the total value of the market shares at the time of index creation is assumed to be 100 points. this is for the purpose of logically representing the change in terms of %. therefore, if the market capitalization goes up 10%, the index also goes up 10% to 10.
Now, let’s say there is only one stock in the market. The base value is set to 100, and let’s say the stock is currently trading at 200. Tomorrow, if the stock price is 260, the increase in price is 30%. therefore, the index will go from 100 to 130, which indicates a growth of 30%. now if the stock price drops to 208, that means a 20% drop from 260. so to indicate the drop, the sensex will correct from 130 to 104.
for example: the sensex index on June 19 was 26,625.91, which means that the change in the value of the index during the previous day (June 18) was 0.38%.
s&p cnx nifty (also called nifty 50 or nifty)
nifty was created in 1996 and is made up of 50 shares listed on the national stock exchange. It covers 24 sectors of the Indian economy and offers investors exposure to the Indian market in a single portfolio.
nifty is calculated using the same methodology adopted by the mumbai stock exchange to calculate sensex. however, there are three basic differences:
base year taken is 1995 (sensex is 1979)
base value is 1000 (sensex is 100)
nifty is calculated on 50 active shares traded on the nse (sensex is calculated on 30)
for example: the nifty index on June 19 was 8,170.20, which means that the change in the value of the index during the previous day (June 18) was 0, 36%.
both sensex and nifty have individual indices that represent a sector. this helps investors systematically track market trends from day to day.
Consider this friendly advice: If the stock market is your preferred playing field, then you need to know how to keep an eye on the scorecard: the two stock indices. and for that, you can visit our website that provides minute by minute update of the stock indices.