Does Sensex make any Sense?

Dow Jones for New York Stock Exchange, Nikkei for Tokyo Stock Exchange, Nasdaq Composite for NASDAQ, Sensex for Bombay Stock Exchange (BSE), Nifty for National Stock Exchange (NSE) and the list continues. But what are these? Why do people even bother to know about them?  Nifty fifty (or just Nifty) and Sensex are the stock market indices in India. These are the indicators which tell the anxious investors in India largely about the share prices of stocks listed in these exchanges. People have huge amounts of money riding on stocks and Sensex and Nifty tell them about the market sentiments.

Sensex is an indicator for the value of the stocks listed on the Bombay Stock Exchange. This value-weighted index consists of 30 companies from the BSE as representatives. This implies that the stocks of these 30 companies are the most actively traded ones in the stock exchange. The market capitalization of these 30 companies account for 50% of the total market capitalization in the Bombay Stock Exchange. This index, at any point of time, reflects the value of stocks relative to the base period.  The base period is  considered to be at 100. The big names listed under Sensex include Infosys Technologies Ltd., ITC Ltd., Maruti Suzuki India Ltd., Reliance Industries Ltd., Tata Motors Ltd., etc.

Nifty on the other hand has 50 companies under its umbrella. All these 50 companies are listed on the National Stock Exchange and Nifty performs the job as a loyal indicator of stocks in the NSE. Here also, most of the companies boast of large capital share in the market. The companies in the Nifty index are well diversified and cover 23 sectors of the Indian economy. The market capitalization of the companies under this index envelops 60% of the total market capitalization in NSE. Base period for Nifty is 3^rd November 1995. Nifty has top names like Reliance Industries, Infosys Technologies, ICICI Bank and Larsen & Toubro in its profile which constitute about one-third of the weight of the index.

After knowing about these incredible indices which control the stock market to such a great extent; the method followed for calculating these indices deserve a mention. It is done through a “free-float market capitalization” method. It sounds big, but it is not rocket science. To put it in simple words “Market Capitalization” is the value of the company in terms of its share capital raised through the market. This is how we have labeled different companies under small-cap, mid-cap and large-cap (cap for capitalization). Let’s dig in a little deeper, all the shares of a company are not available in the stock market. Some of the shares are held by the company’s promoters, government and some are held in the FDI route. Rests of the shares are accessible in the “open market” and are free for trading by anyone; these are called the “free-float” shares. While calculating these indices, we are interested in these “free-float” shares only. If we multiply the current price of free-float shares by number of shares, we will get the “free-float market cap” which is the value of a company in the stock market. Hence, to calculate Sensex, a market cap of 30 companies is used and a market cap of 50 companies is used for Nifty.

The level of Sensex and Nifty are immensely helpful in determining the current value of stocks in the market. Closely following the market trends can help speculate future response. For the same reason, now the job done by researchers and market analysts  is regarded as a profession in the current scenario. The information provided by them is essential for making crucial decisions in terms of investing and other market activities.