“According to an official survey, 85 percent of the city’s youth prefer soft drinks.”
This type of headline is not uncommon in newspapers. However, in a survey like this, researchers do not go around the city interviewing every single young person. It is not only prohibitively expensive, but also impossible. Instead, they employ a statistical method known as sampling. This is a method for using a sample to make statistical inferences about a population.
Are you curious about the relationship between the stock market and sampling? Well, a lot more than you might believe, especially when it comes to stock market indices like the Sensex and the Nifty. This type of headline is not uncommon in newspapers. However, in a survey like this, researchers do not go around the city interviewing every single young person. It is not only prohibitively expensive, but also impossible.
If you want to examine the stock market’s performance, it can be difficult to keep track of each and every stock. As a result, the performance of the entire market is represented by a small group of stocks. An index is a type of sample. The price of the stocks chosen in the sample is used to compute the index’s value.
What is an Index?
A stock market index, usually referred to as a stock index, is a statistical metric that measures market fluctuations. It’s made up of a few similar stocks chosen from among the securities listed on the exchange, and the selection criteria could include a company’s size, market capitalization, or industry type. The value of the index is affected by changes in the prices of the underlying securities. If prices rise, the index will rise, and if prices fall, the index will fall.
Why do we need Indices?
Stock indices are essential to understand the market’s attitude and sentiment. By looking at the indices, an investor can determine the market’s pattern and utilize it to determine which stock will prove to be a winning investment. Indices serve as a barometer for peer comparison in addition to assisting you in deciding which stock to invest in. A stock is said to have outperformed the index if it has produced higher returns than the index. On the other hand, it is deemed to have underperformed if it has generated lesser returns.
Stock indices can also help you spot trends in a specific industry and make informed investment decisions. They can also assist you with passive investing, which is when you invest in a portfolio of stocks that closely mirrors the index. You can save money on research and the equities selection process by investing passively.
Types of Indices in Indian Stock Market
The following are some of the most prevalent types of indexes in the Indian stock market:
- BSE Sensex and NSE Nifty are two benchmark indices.
- Nifty 50 and BSE 100 are broad-based indices.
- BSE Midcap and BSE Smallcap are market capitalization-based indices.
- CNX IT, Nifty FMCG, Nifty Bank Index, S&P BSE Oil and Gas, and so on are examples of sectoral indices.
Aside from this, thematic indexes are indices that reflect the performance of broad-based investment concepts in the Indian stock market.
What is Sensex?
The term “Sensex” is widely used in the stock market. So, what exactly is the Sensex? Deepak Mohoni, a stock market analyst, coined the term “Sensex.” The Sensex, which is a combination of the terms sensitive and index, represents 30 of the largest and most actively traded equities on the Bombay Stock Exchange (BSE).
These equities represent diverse areas of the economy and belong to some of India’s largest firms. The BSE Sensex was initially released on January 1, 1986, and is widely considered as India’s stock market pulse.
How is Sensex calculated?
Now that you know what the Sensex is, let’s look at how its value is determined. The free-flow approach is used to calculate the Sensex. This strategy considers the proportion of shares that can be exchanged quickly. The BSE then calculates the market value of all 30 companies whose stocks are traded, after which it derives a free-float factor. It assists in estimating free-float market capitalization, after which the ratio and proportion are applied to the base index of 100 to determine the Sensex value. The following is the formula:
Sensex = (Total free float market capitalization/Base market capitalization) X Base Index Value
What is Nifty?
Another extensively used name in the stock market is Nifty. So, what exactly is Nifty? The National Stock Exchange (NSE) index is another famous stock exchange in India. Nifty 50 is a stock index that consists of 50 stocks. India Index Services and Products Ltd is in charge of it (IISL).
How is Nifty calculated?
Let’s look at how Nifty’s value is calculated now that you know what it is. The value of Nifty, like the Sensex, is derived using the free-float market capitalization-weighted technique. Nifty is calculated using the following formula:
Nifty = (Current Market Value / Base Market Capital) X Base Index Value
The base index value, in this case, is 1,000.
What is BSE and NSE?
If you invest in the stock market, you should be aware of two additional terms: BSE and NSE. So, what exactly are BSE and NSE? The Bombay Stock Exchange, also known as the BSE, is Asia’s oldest stock exchange. BSE, which was founded in 1875 and allows investors to trade in a variety of financial instruments such as shares, derivatives, currencies, and mutual funds, has played an important role in the growth of India’s capital markets.
The National Stock Market, or NSE, was established in 1992 and is another famous stock exchange in India. The NSE, like the BSE, offers shares, debt, derivatives, and bonds for trading and investment. The National Securities Exchange (NSE) created the country’s first automated, screen-based electronic trading system and was a driving force behind the establishment of the National Securities Depository Limited (NSDL), which allows investors to keep and transfer shares electronically.
CONCLUSION
The Sensex and the Nifty are two of the most well-known stock market terminologies. So the next time you hear that the Sensex has increased by 100 points or that the Nifty has decreased by 200 points, you’ll understand how the figure is derived and, more importantly, what the main takeaway is. In times of market turbulence, stock market indices are incredibly valuable and act as a cushion for cautious investors. If you’re new to the stock market, it’s a good idea to start by learning about stock market indexes and putting your money where your mouth is to have a better understanding of how the markets work in practice. With IIFL, you may now design a portfolio that mimics a stock market index. Through expert suggestions and an investment strategy customized specifically for your risk appetite, it will cut the costs of research and stock choosing without affecting the quality of your assets.
References:
1. IIFLSecuritites l Partners, What Are Stock Market Index/Indices, https://www.indiainfoline.com/knowledge-center/share-market/what-are-stock-market-index
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