Everyday the news channels, the news papers and all those business journals keep on chanting things about the Sensex – “The BSE stock index is in a roll , the NSE too has scaled unprecedented heights touching these many points.”
What's this Sensex?
Well it is the benchmark index for the Indian stock market. It is the most frequently used indictor while reporting on the state of the market. The index has just one job: To capture the price movement. So a stock index will reflect the price movements of shares while a bond index captures the manner in which bond prices go up or down. If the Sensex rises, it indicates the market is doing well. Since stocks are supposed to reflect what companies expect to earn in the future, a rising index indicates investors expect better earnings from companies. It is, therefore, also a measure of the state of the Indian economy. If Indian companies are expected to do well, obviously the economy should do well too. The Sensex stands for The Bombay Stock Exchange Sensitive Index.
What is the Sensex made of?
Thirty stocks! That's right. Just 30 stocks tell you how the market is faring. These thirty stocks are the most actively traded stocks in the market. In fact, they account for half the BSE's market capitalization ( Market cap is the worth of a company in terms of it’s shares! To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the “market capitalization”. To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”!)
Besides, they represent 13 sectors of the economy and are leaders in their respective industries. Now that sounds fair, doesn't it? So how are these 30 prized stocks selected? Well, the stocks are selected by the Index Committee that consist of individuals including academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets. The following criteria is taken into consideration for selecting these 30 stocks:
▪ The stock should have been traded on each and every trading day (the days on which the stock market works) for the past one year.
▪ It should be among the top 150 companies listed by average number of trades (buying or selling of shares) and the average value of the trades (in actual rupee terms) per day over the past one year.
▪ The stock must have been listed on the BSE for at least one year.
The Sensex/ The Bombay Stock Exchange Sensitive Index is the oldest index in the country. It was born in 1986. Apart from the BSE , stocks are traded in all major stock exchanges of the state. However in terms of volume of transaction and popularity, the National Stock Exchange or NSE follows close. The National Stock Exchange has an index called the Nifty (officially called S&P CNX Nifty). This name can be credited to the 50 stocks that comprise its index.
The Nifty has 50 stocks covering 24 sectors, as against 30 stocks and 13 sectors for the Sensex.These 50 stocks account for around 60 percent of the market capitalization.
Apart from the BSE and NSE there are other sectoral indices as well that reflect the sentiments of the stocks related to one particular sector. For example, the BSE's IT Index captures the price movements of information technology stocks while its Bankex represents the change in the prices of bank stocks. So a look at the specific sector index will tell you about that particular sector. For instance, bank stocks may not be performing and that will be reflected in the Bankex falling or remaining stagnant even though the Sensex might have gone up.