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What is Sensex & Nifty? - Part I

 

The fluctuations taking place in the share market are similar to a roller coaster ride. Generally, when we sit on a roller coaster ride, we mostly know of when the ride is going to go downwards but when the share market is in an uptrend, we have no idea whatsoever that when is it going to go down. When the share market is in an uptrend, there is a headline in the newspaper titled ‘Surge in the Sensex.’ Similarly, when there is a market crash, there is a headline in the newspaper titled ‘Sensex falls heavily.’ So what is this Sensex & Nifty? We have established Aryaamoney to promote financial literacy and to empower all with knowledge. 

 

If you want to trade or invest, then there are namely two exchanges where you can do so i.e. Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). Both of these are located in Mumbai itself. The index defined by the Bombay Stock Exchange is called ‘Sensex’ while the index defined by the National Stock Exchange is called ‘Nifty’. What do we mean by Index? Also, analyzing the figures of the Index helps us in understanding that we can earn excellent returns from the share market in the long-run. 

 

If you plan to invest in the share market for the long-term by analyzing the past data of Sensex & Nifty then we should know the five important facts about it. If we want to purchase potatoes, cabbage or carrots then we go to the vegetable market. Similarly, if we want to purchase shares in the share market then we can buy them from the exchange i.e. Bombay Stock Exchange and National Stock Exchange. Now, the index defined by the Bombay Stock Exchange is called Sensex, and the index defined by the National Stock Exchange is called Nifty. There are more than 5000 companies that are listed on the Bombay Stock Exchange whereas there are more than 1500 companies that are listed on the National Stock Exchange. So how to figure out the market sentiment, the market trend, and the share prices of the shares from so many companies? That’s the reason Sensex and Nifty have been formed.  

 

Let us understand what does Sensex and Nifty exactly mean? Consider there’s a school and the students are studying in the 10th standard. These students have been divided into different divisions based on their 9th standard results. Those students who have scored around 85% to 100% (today the students score even 100%) were placed in the A division, those who scored around 60% to 85% were placed in the B division and those students who scored around 40% to 60% have been placed in the C division. So, this year’s 10th standard exams were conducted and the results were out. Those students who used to score around 85% on an average; this time scored 60%, which means this year’s exams were quite tough. Similarly, the results of the B, C, and D divisions followed a decreasing trend. Thus, it means we can assume the pattern of the entire 10th standard by just observing the scores of A division students.

 

Can we apply this same logic to the share market as well? Yes. Bombay Stock Exchange consists of more than 5000 companies that are listed; out of which only ‘top 30’ companies from different sectors form the BSE index known as Sensex. So if we choose the SBI from the banking sector, TCS and Infosys from the IT sector, etc. forming a group of top 30 leading companies then it is known as Sensex. Similarly, Nifty consists of close to 1500 companies but out of which only ‘top 50’ companies from different sectors form the NSE index.

 

If the investors kept on buying upwards in the top 30’ companies of Sensex, then we say that the Sensex is going up. Similarly, if the investors kept on selling at lower prices in the top 30’ companies of Sensex, then we say that the Sensex is going down. In this manner, we can say whether the market is in an uptrend or downtrend by looking at the trend of the Sensex. The same thing goes with Nifty too. In simple terms, Sensex and Nifty together form the A division of the share market.  

 

We will see the five important facts in our next blog. 

 

Until next time…

 

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