A market index is simply a convenient summary of market prices. An index helps make sense of this chaos and gives you a single number which tells you how well the market is performing compared to earlier periods. An index is basically an indicator. It gives you a general idea about whether most of the stocks have gone up or most of the stocks have gone down.
Market indices are an integral part of the stock market (A stock market is a place where you can sell or buy shares or stocks of companies) and the performance of stocks that constitute the index determine how the index performs. If the stock prices go down, then the index of also falls. Conversely, any rise in stock prices means that the index will also rise.
Sensex and NIFTY are two such prominent market indices that function within the Indian stock market. The Sensex is an indicator of all the major companies listed on BSE (Bombay Stock Exchange) which is situated at Bombay. The Nifty is an indicator of all the major companies listed on NSE (National Stock Exchange) which is situated at Delhi. These two are the major stock exchanges in the country. Most of the stock trading in the country is done though the BSE & the NSE.
The Sensex goes up when prices of stock of major companies on BSE goes up and it goes down when the latter goes down. The same condition applies to Nifty.
If the Sensex goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the Sensex goes down, this tells you that the stock price of most of the major stocks on the BSE have gone down.
Just in case you are confused, the BSE, is the Bombay Stock Exchange and the NSE is the National Stock Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi. These are the major stock exchanges in the country. There are other stock exchanges like the Calcutta Stock Exchange etc. but they are not as popular as the BSE and the NSE. Most of the stock trading in the country is done though the BSE & the NSE.
Besides Sensex and the Nifty there are many other indexes. There is an index that gives you an idea about whether the mid-cap stocks go up and down. This is called the “BSE Mid-cap Index”. There are many other types of indexes.
The major difference between these two stock exchanges is the date of establishment; NSE was established in 1992 while BSE in 1875, making it the oldest stock exchange in India. In addition, BSE is also the world’s 11th largest stock exchange in terms of market capitalization.
1. Market Capitalization: is the worth of a company in term of it’s shares. To get the market capitalization of a company we simply multiply the current price of a share with total number of shares issued by the company.
2. Free Float Market Capitalization: Many types of investors hold shares of a company. But only the “open market shares” of a company are available for trading in stock markets. A company provides list of all it’s shareholder to BSE. BSE has it’s certain set of measures through which it decides how many share of the company falls under “open market shares”.
So, the Free Float Market Capitalization is the total amount we have to pay for buying all the open market shares of a company.
How Sensex and Nifty are calculated – The Basic Idea
The Sensex is calculated taking into consideration stock prices of 30 different companies listed on BSE . It is calculated using the “free-float market capitalization” method. This is one of the best methods for calculating a stock market index. The 30 companies that are taken into consideration are changed from time to time. This is done to make the Sensex an accurate index.
The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”.
This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.
- SENSEX: Main index of BSE, consisting of 30 stocks, representing large, well-established and financially sound companies across key sectors
- MIDCAP: This includes scripts which gives market capitalization coverage between 80% & 95% (i.e. when companies are arranged in descending order of their market capitalization, this group contributing 15% (80-95%) of Market capitalization).
- SMLCAP: This includes scripts which gives market capitalization coverage between 95% & 100% (i.e. when companies are arranged in descending order of their market capitalization, this group contributing 5% (95% & 100%) of Market capitalization).
- BSE-500: It represents more than 93% of the listed universe.
- S&P CNX NIFTY: The main index of NSE, consisting of well diversified 50 stock index accounting for 24 sectors of the economy.
- CNX NIFTY JUNIOR: This also consists of 50 stocks. S&P CNX Nifty and the CNX Nifty Junior make up the 100 most liquid stocks in India.
- INDIA VIX: India VIX is a volatility index based on the NIFTY Index Option prices.
- CNX 100: CNX 100 is a diversified 100 stock index accounting for 35 sector of the economy, owned and managed by India Index Services & Products Ltd. (IISL), a joint venture between CRISIL & NSE.
- S&P CNX DEFTY: S&P CNX Nifty is S&P CNX Nifty, measured in dollars for performance indication to foreign institutional investors, off-shore funds etc
- S&P CNX 500: The S&P CNX 500 companies are disaggregated into 71 industry indices viz. S&P CNX Industry Indices. Industry weightages in the index reflect the industry weightages in the market.
- CNX MIDCAP: CNX Midcap Index captures the movement and act as a benchmark of the midcap companies with minimum 3 years of operation and a positive net worth.
- NIFTY MIDCAP 50: This consists of stocks with average market capitalization ranging from Rs.1000cr to Rs.5000cr, excluding those in S&P CNX NIFTY and which are not part of the derivatives segment.
What is the importance of Sensex and Nifty?
- The primary purpose of a market index is to be an indicator of how the stock market will perform.
- Financial research analysts use market indices in economic research for facilitating better regulatory measures to increase the market cap as well the performance of the stock market.
- Market indices play a significant role in passively managed Index Mutual Funds. They are also used as benchmarks to measure the performance of Fund Managers handling mutual funds.
- Analysis of market indices allow individuals to use index-based derivatives to offset risk through hedging. In that regard, market indices have a big part in the risk management practices within the global economy.