Understand the basics of Stock Market Indexes | Motilal Oswal
Understand the basics of Stock Market Indexes | Motilal Oswal

The Basics of Stock Market Indexes

We all know that a body moves when an external force act on it. Similarly, there are internal & external economic factors (forces) acting on a domestic market(body) from all directions, resulting in market trends. These trends are either upward or downward in nature. And to help you distinguish between the two trends, there is a metric called the stock market index.

A stock market index combines several stocks to create one aggregate value that investors useful measuring a market’s (eg: Bombay Stock Exchange and National Stock Exchange), or a sector’s (eg: energy, infrastructure, real estate) performance. In the Indian context, there are two major stock market indexes used for evaluating markets: SENSEX and NIFTY. Indian investors can track changes in these indexes values over time and use it as a benchmark against which to compare their own portfolio returns.

Now when investors talk about the market, it means that there are stock market indexes of 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 market indexes. Thus, by understanding of how stock market indexes are created and how they differ, you will be able to make sense of the daily movements in the Indian marketplace.

S&P BSE SENSEX (also called BSE 30 or SENSEX)

SENSEX (or SENSITIVE INDEX) was created in 1986 and is the oldest stock market index for equities. It comprises of shares of 30 well-established and financially sound companies listed on BSE. These companies represent various industrial sectors of the Indian economy.

Calculation of SENSEX

SENSEX has adopted the market capitalization weighted method in which weights are assigned according to the size of the company. Larger the size, higher the weightage.

Now, the total value of market shares at the time of creation of index is assumed to be100 points. This is for the purpose of logically representing the change in terms of %. So, if the market capitalization moves up 10%, the index also moves10% to 10.

Now let’s say, there is a single stock in the market. The base value is set to 100, and let’s assume that the stock is currently trading at 200. Tomorrow if the price of the stock is 260, the increase in price is 30%. Hence, the index will move from 100 to 130, indicating a 30% growth. Now if the stock price comes down to208, then that’s 20% fall from 260. Thus, to indicate the fall, the SENSEX will be corrected from 130 to 104.

For eg: SENSEX index as of 19th June was 26,625.91, which means that the change in the value of index over the previous day (18th June) was 0.38%.

S&P CNX NIFTY (also called NIFTY 50 or NIFTY)

NIFTY was created in 1996 and comprises 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.

Calculation of NIFTY

NIFTY is calculated using the same methodology adopted by the Bombay Stock Exchange in calculating the SENSEX. However, there are three basic differences:

The base year taken is 1995 (SENSEX is 1979)

The base value is 1000 (SENSEX is 100)

NIFTY is calculated on 50 active stocks traded in the NSE (SENSEX is calculated on 30)

For eg: NIFTY index as of 19th June was 8,170.20, which means that the change in the value of index over the previous day (18th June) was 0.36%.

Both SENSEX and NIFTY have individual indices representing a sector. This helps investors keep systematic track of market trends on a day-to-day basis.

Consider this as a friendly advice: if stock market is your preferred playground, then you must know how to keep a watchful eye on the scorecard – the two stock market indexes.  And for that, you can visit our website that gives minute-by-minute update of the stock market indexes.

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