Do you hear the terms Sensex, BSE, NSE, and Nifty all the time? The BSE, NSE, and Nifty are the foundations of the Indian stock market. Here's an article to help you understand what these terms mean and everything else you need to know about Sensex.
What exactly are BSE and NSE?
BSE is an abbreviation for the 'Bombay Stock Exchange.' Founded in 1875, the Bombay Stock Exchange (BSE) is India's first and largest securities market. NSE stands for 'National Stock Exchange.' Founded in 1972, much later than the BSE, and provides a countrywide stock market similar to the BSE. While the BSE is older, the NSE is larger, with more daily trades and a higher turnover rate.
What exactly are the Sensex and Nifty?
While the BSE and NSE are both stock exchanges, the Sensex and Nifty are both stock market indices. A stock market index statistically summarizes the market's real-time movements. A stock market index is created by selecting and grouping similar types of stocks from a market or exchange. The Bombay Stock Exchange's stock market index is known as the Sensex, which stands for 'Stock Exchange Sensitive Index.' It computes the movement on the BSE. The index for the National Stock Exchange is known as the Nifty, which stands for 'National Stock Exchange Fifty.'
Stock Market Indices:
There are various types of stock market indices. These are some of the more notable ones you may have heard of:
1. Benchmark Index:
The primary metric for analyzing market movements is because it represents the overall performance of the market. It is a comparative statistical measure, which means it compares the amount earned by the average fund in the market to the amount it should have earned. For example, the BSE Sensex and the NSE Nifty (Nifty 50).
2. Broad Market Index:
These are benchmark indices that tend to include more stocks. For example, BSE 100. The BSE Sensex index combines the movements of the 30 largest financially sound Indian companies listed on the BSE. The same is true for the top ten on the BSE 100.
3. Market Capitalization Index:
A measure of a company's components about the total market value (capitalization) of its outstanding shares. BSE Smallcap, BSE Midcap, and so on.
4. Sectoral or Industry-based Index:
Provides benchmarks and summaries of stock performance in specific industries such as healthcare, energy, industrial goods, technology, and so on. Nifty FMCG index, CNX IT.
The Importance of a Stock Market Index
Stock market indices such as the BSE and Sensex serve to summarize the market's state. They assist investors in identifying market patterns. The stock market index is necessary for investors for the following reasons:
1. Convenient Metric for Beginners:
Equity investing can be risky, especially for inexperienced investors. While learning about the stock market through courses or with the assistance of an expert is recommended, it may be impractical for some people due to the time commitment. At times like these, stock market indexes like the BSE Sensex and NSE Nifty bridge the knowledge gap between novice and experienced investors by providing a simple depiction of market trends.
2. Reflects Investor Sentiments:
Another important reason stock market indices are valuable is that they summarize the daily sentiments of investors who trade on them. During times of political upheaval, for example, certain stocks begin to underperform, indicating that investors are uncertain or nervous about new reforms, mandates, and the like. Understanding the underlying sentiments enables investors to determine whether a trend is short-term or long-term.
3. Passive Investment:
Passive investment is when an investor invests in a similar portfolio of securities to replicate the stocks in a high-performing index. It is referred to as passive investing because it is faster, requires less research, and allows for the purchase of multiple stocks in a portfolio with a single click. The returns on the replica portfolio should be similar to the returns on the index.
4. Assists You in Choosing the Right Stocks:
There are thousands of companies listed on a single stock exchange. It appears intimidating and time-consuming to determine which stock to invest in from such a large number. Without a benchmark index, distinguishing between two stocks is difficult, and sorting them is nearly impossible. A stock market index addresses this issue by distinguishing between stocks. It categorizes company shares based on industry type, size, financial impact, and so on.
Finally, Sensex and Nifty are required to buy and sell stocks on the BSE and NSE using your trading account. Numerous indices summarize stock performance based on industry, company size, and other factors. Indices aid in the faster selection of stocks, the discovery of underlying investor sentiments, and the facilitation of convenient passive investing.
Another critical step before beginning your trading journey is to open a trading account. For those who are unfamiliar with the concept of a trading account, an online trading account allows you to access the BSE and NSE to buy and sell stocks using stock market indices such as the Sensex and Nifty as a guide.
Nov 17, 2021