Everyone is interested in doubling money and making investments, especially in the stock market. To do so we must know the concept behind INDEX, NIFTY & SENSEX and what they are exactly. As for the basics, let us learn what is meant by an index first.

Also read: Difference between money market and capital market

INDEX

It is a representative figure of a group of companies. The index is a measurement of the portion of the stock market that chooses a set of liquid stocks that tend to be market leaders of the economy and best represent the economy as a whole or based on certain sectors. It helps investors to understand the health of the market and study the market sentiment. This makes it easy to compare the performance of an individual stock

Some indexes are

• America’s S&P 500
• UK’s FTSE 100
• NIFTY 50 of National Stock Exchange, India
• SENSEX of Bombay Stock Exchange

It can be used as a forecasting tool, a historic indication of the performance of the stock market. Thus giving investors an insight into their investment decision and portfolio.

Each index has its methodology, which is calculated and maintained by the index provider based on the market capitalization, size of the company, or type of industry. It can be calculated in two ways:

MARKET CAP WEIGHTAGE a.k.a (Free Float Market capitalization)

Total Market Capitalization – Promoter/Government Holding

The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by corporate actions, the replacement of scrips.

PRICE WEIGHTAGE

Index Value = Stock price of a company (Higher Price: - Higher Weightage)

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Nifty

Nifty is the flagship benchmark of the National Stock Exchange, a well-diversified index, comprising the top 50 companies in terms of free-float market capitalization that are traded on the stock market.

To find out the country’s economic health one can track the stock market of that country for the above purpose. India’s economy can be monitored through Sensex (index of Bombay Stock Exchange) & Nifty (index of the national stock exchange), the major indexes of India.

The term nifty is derived from two terms - National and fifty. The National Stock Exchange comprises 1600 + listed companies out of which the top 50 companies make up the index of NSE.

NSE launched the NIFTY 50 index in 1996. The base period for the NIFTY 50 index is 3 November 1995, which marked the completion of one year of operations of the National Stock Exchange Equity Market Segment. The base value of the index has been set at ₹1000.

There are different sectoral indexes. If one wants to track only the power sector assuming Reliance, Adani, and all these companies and know their conditions then the power index has to be followed. Further examples are Auto, Bankex (banking index), Midcap, and SmallCap.

The stock shall be chosen from the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis.

The selection of the index set is based on the following criteria:

Liquidity:

For inclusion in the index, the security should have traded at an average impact cost of 0.50 % or less during the last six months for 90% of the observations for a portfolio of Rs10 crores.

Impact cost is the cost of executing a transaction in a security in proportion to its index weight, measured by market capitalization at any point in time. This is the percentage mark-up suffered while buying/selling the desired quantity of a security compared to its ideal price -- (best buy + best sell) two.

Float-Adjusted Market Capitalization:

Companies will be eligible for inclusion in the NIFTY 50 index provided the average free-float market capitalization is at least 1.5 times the average free-float market capitalization of the smallest constituent in the index.

Listing History:

A company, which comes out with an IPO, is eligible for inclusion in the index if it fulfils the normal eligibility criteria for the index - impact cost, float-adjusted market capitalization for three months instead of six months.

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SENSEX

Sensex is the major index of BSE. It was launched in the year 1978 and the base year is 1978-79. The base value of the index is taken as ₹100. BSE Sensex is a free-float market capitalization index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange out of 5000 + listed companies. BSE Sensitive Index then was at about 750 points. The term SENSEX is the combination of the words Sensitive and Index. In this, all sectors are presented, and market leaders represent such sectors.

How are these 30 companies selected?

The BSE's criteria for selecting these companies are as followed:

• BSE-listed stock: The stock should have a listing history of at least one year on BSE.
• Market capitalization: The Company should be in the Top 100 companies listed by full market capitalization.
• Trading frequency: The Security should have been traded on each trading day for the last one year, BSE says. Exceptions to this can be made for extreme reasons.
• Average Daily Trades and Average Daily Turnover: The Security should be in the Top 150 firms listed by the average number of trades per day and by the average value of shares traded per day for the last one year.

When swimming your way into the ocean of finances and investments, coming across these jargons can be challenging. But there is always Nu Cash to ease things out for all of you out there.