Saturday, May 27, 2006

Sensex? Wht's that?

Sensex? Wht's that?

What's so hot about the Sensex?

It is the benchmark index for the Indian stock market. It is the most frequently used indictor while reporting on the state of the market.

The index has just one job: To capture the price movement. So a stock index will reflect the price movements of shares while a bond index captures the manner in which bond prices go up or down.

If the Sensex rises, it indicates the market is doing well. Since stocks are supposed to reflect what companies expect to earn in the future, a rising index indicates investors expect better earnings from companies.It is, therefore, also a measure of the state of the Indian economy. If Indian companies are expected to do well, obviously the economy should do well too.In case you are wondering why a stock market index has a provocative term like Sensex, let me tell you it stands for something quite mundane -- The Bombay Stock Exchange Sensitive Index.

What is the Sensex made of?

Thirty stocks. That's right. Just 30 stocks tell you how the market is faring.

Before you throw up your hands in protest, there is something you should know about these 30 stocks.For one, they are the most actively traded stocks in the market. In fact, they account for half the BSE's market capitalisationBesides, they represent 13 sectors of the economy and are leaders in their respective industries. Now that sounds fair, doesn't it?

Who selects these 30 stocks?

They are selected by the Index Committee.This committee consists of all sorts of individuals including academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.

How do they select these 30 stocks?

Well, they definitely don't do it on the basis of their individual whims and fancies. Some of the criteria they follow include:

~ The stock should have been traded on each and every trading day (the days on which the stock market works) for the past one year.

~ It should be among the top 150 companies listed by average number of trades (buying or selling of shares) and the average value of the trades (in actual rupee terms) per day over the past one year.

~ The stock must have been listed on the BSE for at least one year.

The Nifty? What's that?

Well, the National Stock Exchange has an index called the Nifty (officially called S&P CNX Nifty). This name can be credited to the 50 stocks that comprise its index.

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