Importance and Calculations - Stock Market Index

stock market

What do understand by Stock Exchange?

A stock market is a company that runs a market where equities are offered for sale and bought. If a company’s shares are bought and sold at a stock exchange, then such a company is called a "listed" Company.

One Country can have more than one stock exchange. The Bombay Stock Exchange (BSE) and India's National Stock Exchange of India (NSE) are the two well-known stock exchanges in India.

Sensex and Nifty

A brief overview of the significance and calculation of the stock market indices.

  • The Sensex, also known as S&P BSE Sensex, S&P Bombay Stock Exchange Sensitive Index, or BSE 30, is a free-float market-weighted stock market index made up of 30 well-enough and fiscally responsible companies listed on the Bombay Stock Exchange.
  • The Nifty is another well-known market index in India.
  • The Sensex is regarded as the beating heart of India's local stock markets; it was first published on January 1, 1986.
  • The Sensex is one of the oldest market indices for equities.
  • The word “Sensex” comes from “Sensitive Index”. 
  • The market capitalization of the index's free-float portion is made up of roughly 45% of the Sensex.

The benchmark stock market index for the Indian stocks market is the S&P CNX Nifty, also known as the Nifty 50 or just Nifty. It is maintained by the NSE.

  • Nifty includes 50 shares listed on the NSE.
  • It was launched on April 21, 1996. 
  • Word Nifty comes from NSE and Fifty.
  • India Index Services and Products (IISL), a fully-owned subsidiary of the NSE Strategic Investment Corporation Limited, is the company that owns and operates it.

A Stock Market Index is calculated in various ways as follows: - 

  • Price-weighted index: a stock index where each stock's impact on the index depends on its share price. The Dow Jones Industrial Average, for instance.
  • Market value-weighted or capitalization-weighted: The weight of each component is determined by its market capitalization. For instance, the NASDAQ Composite, the NASDAQ-100, etc.
  • Free-float market capitalization Weighted: Based on the overall amount of freely traded shares in the market, excluding promoter-owned shares. Sensex, Nifty-50, FTSE-100, and CAC 40 are a few examples.

Sensex and Nifty-50 Calculation

The market's free float value weighted method will be used to calculate the S&P CNX Nifty as of June 26, 2009. The price close on November 3, 1995, serves as the base period for the S&P CNX Nifty index. The index's base value is 1000, and its base capital is Rs. 2.06 trillion. Visit the NSE site's index calculation for further information.

The SENSEX index was established in 1986 and is built using 30 component stocks and a market capitalization-weighted methodology. The businesses represented by these stocks span a wide range of important industries and are large, well-established, and financially sound. 1978–1979 was chosen as the SENSEX base year. The SENSEX has been produced since September 1, 2003, using a free-float market capitalization technique. One book has an in-depth description of the method used to calculate the Sensex.

Importance of Stock Market Index

Every shift in a stock's price can be linked to either local or global news, such as the introduction of a new product or the closing of a factory, in the corporate world (e.g., nuclear bombs, a budget announcement, etc.). The second component of the equation, or overall market movements, is an index's only original intent. News that is shared by all stocks is news that has an impact on the entire nation.

There might be both positive and negative stock-specific news for various companies on any given day. These will cancel out in an effective index, leaving only the data that concerns all stocks. It will appear in the index. Many techniques that incorporate some type of averaging are used to build the index, allowing the effects of individual stock news and movements to cancel out and lower risk.

The average of an index takes the place of variety. Indicators inform us whether the stock market is hot or cool and act as a general indicator of its condition.

Stock market indices are useful for a variety of reasons, including:

  • They compare historical stock market results to those of other investment options like gold or debt.
  • They can be compared as a benchmark to determine how well an equity fund has done.
  • It acts as a forward-looking measure of how well the economy as a whole or a specific sector is doing.

Financial investment and risk management are significantly influenced by modern financial applications like index funds, index futures, and index options. Stock indices represent extremely up-to-date data.

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