One of the important stock indices of India is the Sensex. It tracks 30 renowned companies listed on the Bombay Stock Exchange. The companies are from a wide range of the economy including banks, IT, energy, health care and consumer goods. The index gives investors a quick look at how this group of large listed firms is moving.
The Nifty 50 is the National Stock Exchange’s equivalent. It tracks 50 companies across a range of sectors. It is based on free float market value, meaning it uses shares that can be traded by the public. Both indexes help investors to read market trends and compare returns.
What is a stock market index?
A stock index combines the price movements of a group of shares into a single number. It does not represent the movement of all the stocks in the market.
The index rises if the total value of its companies, weighted by their size, rises. If it goes down, that value has dropped. Some stocks will rise even if the index falls. Others may drop on a day when the index is up.
The weight is different for each firm. The larger the free float market value of the firm, the larger the impact on the index.
So why do the Sensex and Nifty matter?
1. They tell you the general direction of the market
These indices give investors a sense of the sentiment in large-cap stocks. A steady rally could signal widespread buying in index names. A drop could indicate selling pressure.
This is just a first look. Investors should also check sector data and stock-level news before forming a view based on one index move.
2. They Assist in Comparing Returns
A benchmark can be an index. This gives the investor the opportunity to compare a fund or a portfolio against the index over the same time frame.
Say a fund is up 8% for the year, and its benchmark is up 10%. That fund has underperformed its benchmark for the year. Check also for risk, fees and the type of assets held.
A benchmark should also be consistent with the type of fund or portfolio being evaluated. For example, a large-cap equity fund should be compared to a similar large-cap index. This makes the comparison fair. It also keeps benchmark checks clear over time. Using an unrelated index can give a poor or misleading view of performance.
3. They Aid in Tracking Market Reaction
“Sensex and Nifty can move when there is some new data or news. This could be rate changes, inflation, company results, oil prices, rupee, global markets or policy news.
One day’s move should not be seen as a complete signal. There are a number of events which can all affect prices at the same time. A longer-term perspective can help to provide context.
4. They prefer index-based funds
Some index funds and exchange-traded funds, or ETFs, seek to track an index. They seek to track closely the return of that index, net of costs and tracking error.
Also indices are applied on futures and options. This makes them useful not only as gauges of the news, but as reference points for the market.
5. They Simplify Market Checks
There are many listed companies in India. It is not easy to scan every stock every day. The Sensex and the Nifty provide a quick look at a large portion of the large-cap market.
They also assist investors in analysing past market stages. Looking at charts covering months or years, readers can spot rises, falls, sharp variations and calm phases.
How Should Investors Use These Indices?
Most investors follow a simple process when following these indices.
- Check the index over a fair time span. Don’t just rely on one day.
- Identify the sectors that led the charge. This also shows where the purchase or sale took place.
- Consider the shares or funds that you own. Their move might be different than the index.
- Compare your returns to the right benchmarks and to the same period.
- Tie each option to your goal, time horizon and risk tolerance.
An index can help with market investigation, but it cannot replace research. SEBI has also advised investors to take decisions in the securities market after considering their investment objectives and risk appetite.
What Are the Boundaries?
Sensex and Nifty track the major listed companies. They do not include all stocks or all sectors of the economy. Small cap and mid cap shares may behave differently.
A handful of companies with large index weights can also exert sizable influence on the daily move. Thus one index level should not be considered a bird’s eye view of the market.
Conclusion
The Sensex and Nifty guide investors on where the market is heading, help them compare returns and see how big companies react to news. They are also standards for funds, and other market products. Sector data, stock research, and a clear plan, combined, offer useful context for sound investment study.
