We have seen what are stocks & why do they go up and down. To recapitulate the stocks markets are made of hundreds of companies whose stock prices are changing every second.
It is a market place where people buy and sell stocks at varying prices depending on the demand and supply.
But the normal way to describe the daily movements in the stock market is Sensex or Nifty went up or Sensex or Nifty went down.
Lets take up BSE Sensex, What exactly is it?
BSE Sensex – Bombay Stock Exchange Sensitive Index
As mentioned the market place has literally thousands of stocks. Everyday some will rise and some will fall. So if you wish to get a sense of the direction of the markets or on what is happening it is hard to say what exactly happened.
There will be no reference point.
So a mathematical term is used to get the sense of the market.
It is called Index.
Let me simplify.
Say you are a Milk dealer.
· You start with Rs 50 per litre. You start with an index of 100
· Suppose the price increases by Rs. 5, ie 10% increase. Then the Index goes to 110.
· The price increases by further Rs. 5, ie Rs. 60 per litre. The Index goes up to 120, 20% higher thab the starting point. (Rs. 10 increase is 20% increase from Rs.50 which was the starting point of the sensex)
· If the prices falls by Rs 2 ie to Rs. 58 per litre. The Index reduces to 116.
The index keeps score and you can track the ups and downs of the prices.
If you track more things other than milk, say milk, curd, ghee and some milk based sweets. Then you can construct a index which like above starts with 100 and averages out the prices of all of the items individually.
If milk and curd prices go up but the price for ghee and sweets go down then the index will give you an average of all the price movement.
The Index will give a general indication of the movement of all the items daily.
Suppose the price of milk suddenly shoots up by double. Then the index will also change violently and then you can look into it and see what is causing it.
Now coming to BSE SENSEX.
The Sensex as above comprises of 30 stocks. They are picked out by a committee of experts based on a few criteria.
The companies have to be large and a huge volume of trading has to happen in them.
The companies represent a wide spectre of companies from different industries. Say a pharma company, a infrastructure company, a software company, a bank a commodity company, a telecom company etc.
So the prices of 30 companies were taken at a starting point in 1979 as 100.
As the stock prices of these companies keep moving up and down the Sensex keeps moving up and down.
The Sensex is not a simple average but a weighted average of the prices.
What that means is that some companies are given more importance than the others to calculate the Index.
A fun fact – The Index achieved a four figure digit from 100 to 1001 on 25 th July 1990.
As Iam writing this the Sensex had reached an alltime high of 40267 on June 3 2019.
Sensex begun with 100 and now has reached a high of 40000 this year.
A forty times gain in 29 years!
What do you mean when you say Sensex gained 300 points or lost 100 points on a given day?
On a given day the prices of the 30 stocks which make the index go up or down. If the average prices of those 30 companies have gone up then the Sensex may gain 300 points is representative of that move. Similarly a fall of 100 points indicates that on an average prices have fallen.
There is an elaborate mechanism to calculate the actual movement Index but we need not go into it now.
Its just for our understanding on what is the Sensex.
Can the stocks which make up the Index Change?
Yes, they can and they periodically do. For many reasons some company are added to the Index and some are removed. Some may have become defunct and another company in the same industry may be replaced. Other companies may have to be added as they become significant players. Or the trading may have reduced in it for some reason. The volume of transactions in that company may have fallen.
What is Nifty 50?
Just as BSE Sensex is made up stocks which comprise of 30 stocks and is created by the Bombay Stock exchange , Nifty 50 is created by the National Stock Exchange. The Nifty 50 was created in 1996.
The stocks which comprise of Nifty stocks may overlap with the Sensex stocks. Both are used simultaneously by the market. Obviously Nifty has 50 stocks as opposed to 30 stocks in the Sensex, nifty is more broad based.
Are there other Indices?
There are many many indices. Like BSE Midcap, Nifty Bank, BSE IT, NIfty Next 50. All of them are used as bencmarks to track the performance of that particular segment of the market.
But for India the two most important indices are Sensec and Nifty 50.
Henceforth when you see that the Sensex has moved up or the Nifty 50 has moved too you will know that it is the general direction of the movement of the prices of stocks in the market.
Sejal GOEL
Good one.