Indian Stock for Beginners – Basics of Sensex & Nifty
We all have heard about the Dalal street. Dalal street is one of the busiest lanes in the country, where top financial firms and institutions are situated. It is also the location of the Bombay Stock Exchange. Bombay stock exchange is the country’s biggest stock exchange. But apart from BSE, there are also other exchanges in India too. The national stock exchange is also one of the Indian stock exchanges located at Mumbai, Maharashtra. It’s better to understand the Indian stock market.
India stock market capitalization stood at $2.13 trillion, which states the size of the activity happening in the financial market. The majority of trading in India stock market takes place in the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These two forms the backbone of the Indian Stock Exchange. In both, BSE is the oldest stock exchange. It was established in the year 1875. The NSE was established in the year 1992. Despite being new, the exchange follows the same trading mechanism, trading hours, settlement process, etc. At the last count, the BSE has more than 5,000 listed firms, whereas the NSE had about more than 1,100. In 2018, BSE becomes the world’s 10th largest stock exchange in market capitalization. NSE is the world’s 11th largest stock exchange as of April 2018. Only about 500 firms, constitute more than 90% of market capitalization in the BSE.
Importance of index and types of Index:
There are thousands of firms listed on a stock exchange. To track the performance of every stock at a time is quite tiresome and complex. So, in order to make the process simpler, a smaller sample of the whole market is taken into considerations. This small sample is called an Index. It helps in the measurement of the value of a section of the stock market. So, basically, A stock market index is a statistical measure that shows changes taking place in the stock market. Let’s look at the process of creating a stock market index:
- First, a few similar kinds of stocks are selected from the securities already listed on the exchange and grouped together.
- The stock selection can be based upon the type of industry, market capitalization, the size of the company.
- The stock market index value is computed using the value of the underlying stocks.
- Any change whether its uptrends or downtrend taking place in the underlying stock prices impacts the overall value of the index. In case, if the prices of securities move upward, the index will rise upward and vice versa.
Let’s look at the importance of market index:
- It helps an investor to get a general idea about the stock market situation. Either it is uptrend or a downtrend.
- It is also used as a standard benchmark for portfolio performance.
- The index can be used for passive fund management as an underlying for index funds, index futures and options.
Both stock market National Stock Exchange and Bombay Stock Exchange have its own respective Indices. One is called Nifty and the other is Sensex. Let’s understand each one of them.
- Sensex: It is the benchmark index of S&P BSE (Bombay Stock Exchange). It consists of 30 stocks, which is based on various factors like market capitalization, trading frequency, history of the listing, sector to which it belongs. If the demand for these 30 stock increases or people are buying these stocks the Sensex goes and if the demand decreases and then Sensex falls.
Sensex calculation Formula= (Sum of the free-float market cap of 30 benchmark stocks) *Index factor.
Index Factor = 100/Market Cap Value in 1978-79.
Free float Market capital = No of share available for the public to trade* Market price of a share.
- Nifty: It is an index consist of the top best 50 stocks of more than 1500 stocks listed on the NSE. They are taken from 23 different industries operating in the Indian economy, based on parameters defined by an exchange, managing the index. It may include liquidity, market capitalizations, and floating stock.
Formula to calculate Nifty = (Sum of the free-float market of 50 benchmark stocks )* index factor
Index Factor = 1000/Market capitalization value in the year 1995.
The market value for the year is 1995.
1995 is the base year of Nifty calculation.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing