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16 October, 2021 21:21 IST
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Benchmarking a stock

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 rate.

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.
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