Consider this: when you buy potatoes
from your neighbourhood vegetable market, with a short survey you can
ascertain what the prevailing rates for different qualities of potatoes
are. The same becomes impossible when you go to buy stocks. Each stock
has a unique price and unlike potatoes, cannot be clubbed as `a particular
quality of stocks’. A good enough way to benchmark your stock is the market
index. An Index is a composite of stocks that indicates how the overall
market or a part of the market is moving. The grandfather of all indexes
in India is the Sensex.
Is the Sensex sensual and
sexy? That depends on whether it’s up or down, as the day’s headlines
will tell you. And the excitement on the exchange waxes and wanes with
the Sensex. As an index of the Bombay Stock Exchange (BSE), the Sensex
includes the shares of 30 companies that are actively traded on the BSE.
It is a weighted average of prices of the 30 select stocks where the weight
is the market capitalization of individual stocks. These stocks are the
ones that account for a large chunk of both the volume and value of shares
traded on the exchange.
The Sensex is supposed to mirror the
happenings on the BSE. Just as you check only a couple of mangoes in a
basket to decide whether the entire lot is good, so will you check out
the Sensex to get a sense of what is happening in the stockmarket. Being
the oldest index in India it has also attained a position of pre-eminence
in the minds of Indian investors.
The BSE has other indexes apart from
the Sensex. The BSE National Index or the BSE 100 comprises 100 scrips
(or stocks) listed on the BSE. Having a larger basket of stocks the BSE
National Index enables a stable assessment of stock price movements. The
BSE-200 comprises of the equity shares of 200 selected companies listed
on the BSE.
Over the years foreign investors have
shown eagerness in investing in India and many foreign financial institutions
have also entered into the country. The Sensex and other indexes reflect
the growth in market value expressed in rupee terms. The BSE-Dollex is
a yardstick by which these growth values can be measured when the investment
and the return are expressed in dollar terms. The Dollex is a dollar-linked
version of the BSE-200 and hence also sensitive to the rupee-dollar conversion
Similarly, the National Stock Exchange
has an index, the S&P CNX Nifty. Since its inception this index, also
called the Nifty Fifty, has attained great popularity among investors.
Hundreds of calculations are made before 50 stocks of the NSE are selected
for the index. S&P stands for Standard and Poors, a subsidiary of
McGraw-Hill, and an investment advisory service that maintains one of
the most widely followed benchmarks of stockmarket performance, the S&P
500 index. The CNX stands for CRISIL NSE Indices, the two companies that
came together to form the index.
A market index is very important because
one, it acts as a barometer for market behaviour, and two, it helps in
benchmarking portfolio performance. For a particular category of mutual
funds called the index funds, these indexes are used for passive fund
management i.e. all a fund manager has to do to manage his portfolio is
blindly follow the composition of the index.
The role of a good index is to reflect
the state of the overall market at every moment and indicate how the stock
market perceives the Indian corporate sector to fare.