Stock Market Index: Importance and Calculations


What do you understand by Stock Exchange?

A stock market is a company that runs a market where shares are offered for sale and bought. A corporation is referred to as being "listed" if its shares can be bought or sold on a stock exchange.

It's possible to have multiple stock exchanges in a single nation. The two best-known stock exchanges in India are the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE).

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 respectable and financially sound businesses 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 S&P CNX Nifty will be determined as of June 26, 2009,  using the free float value weighted technique of the market. The S&P CNX Nifty index uses the price closing on November 3, 1995, as its base period. The index has a base capital of Rs. 2.06 trillion and a base value of 1000. To learn more, go to the index calculation page on the NSE website.

Using 30 component stocks and a market capitalization-weighted formula, the SENSEX index was created in 1986. These equities cover a wide range of significant industries and substantial, well-established, and financially stable companies. The foundation year for the SENSEX was determined to be 1978-1979. From September 1, 2003, the SENSEX has been created using a free-float market capitalization method. An extensive explanation of the formula used to calculate the Sensex can be found in one book.

Importance of Stock Market Index

In the corporate world, every movement in a stock's price can be attributed to local or global news, like the launch of a new product or the shutdown of a factory (e.g., nuclear bombs, a budget announcement, etc.). An index's only original purpose is the second part of the equation or general market movements. News that is relevant to the entire country is news that affects all stocks.

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 the historical performance of stocks with other investment options, such as gold or debt.
  • They may serve as a benchmark to contrast the outcomes of equity funds.
  • It serves as an indicator of how well the economy as a whole or a particular sector is doing in the future.

Modern financial tools like index futures, index options, and index funds have a big impact on risk management and financial investment. Stock indexes are incredibly current data sources.

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Location: India

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