The Barometers – SENSEX AND NIFTY
Sensex , a word we come across every day .
scrolling down on the side bars of the news channel , stated on the top of the
newspaper and at many other places . It becomes a heated topic of discussion whenever we have to talk about the
economy.
But the exact working and meaning of the Sensex ( or any other index) is
usually not known to people.
Let us first get a bird’s eye view of these two terms which
acts as a barometer of the stock market.
Sensex ( or SENsitive
index) was introduced by the Bombay Stock Exchange in January 1, 1986. It is one of the prominent and most
sought-after stock market indexes in India in comparison to National Stock
Exchange ‘s NIFTY and others.
Sensex ( indicator of Bombay Stock Exchange) is the index or
the indicator which gives a general idea about whether most of the stocks
listed on that stock exchange is going down or going up. It comprises of the 30 stocks of the companies which plays a
significant role in our economy. So basically when the stock prices of
these shares fluctuates ; it indeed fluctuates the Sensex.
Same process happens with Nifty ( National Stock Exchange )
which acts as a barometer of the stocks listed on the National Stock Exchange. Nifty comprises of the 50 listed stocks of
the NSE.
Therefore ; the exchange can create different types of
indexes and thatswhy the indexes such as BSE Mid Cap Index , index for FMCG
stocks etc can be found.
Now let us find out how the figures can are brought in
consideration which acts as indexes.
The method adopted for
calculating Sensex is Market Capitalisation Weighted method.
In this the total value of shares in the market at the time
of index construction is assumed to be 100 in terms of ‘points’ Now when the
market price of the free floating shares (shares which can be sold or purchased
free through stock exchange) rises the points of the barometer also rises and
vice versa. The base year of sensex is 1978-79 and the base index is set to 100
for that period. Then when the prices of the shares rise then the index points
also rise by a percentage calculated taking into consideration the stock
fluctuations of the 30 shares.
Lets take a simple example.
Two companies X and Y,
Price of X is 1000 and price of Y is 2000 ; Now we assume
that company X has 100000 shares and company Y has 500000 shares
Therefore we need to find out the market capitalisation which
is
1000x100000 +
2000x500000 which is 1100000000 ( 110
crores)
The next day X prices fall by 20% (800) and Y prices rise by
45%(2900). The market capitalisation need to be reworked again which is
800x100000 + 2900x500000
= 153 crores which is in
comparison to the which has increased by 39%. Hence the index will increase by
39%.
Therefore ; through this article we have fairy got some basic
knowledge about the meaning and working of the
Sensex and its counterparts.
SAMIR DEWAN
Editor at CHARTERED
BLOOD
