What is Market Index and how it is determined?
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In India there are two major Stock Exchanges, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Index of NSE is called as Nifty and Index of BSE is called as Sensex. Index is a statistical measure of change in an Economy or a Securities Market. In case of financial markets the Index is essentially an imaginary portfolio of securities representing a particular market or portion of it. It gives a general idea about weather most of the stocks gone up or down. Each index has its own calculation methodology and usually expressed in terms of a change from a base value. Hence a change in Index value is more meaningful if expressed in percentage terms rather than absolute terms.
Let’s understand calculation of Sensex. Sensex is calculated taking into consideration stock prices of 30 different BSE listed companies. The base value of Sensex is 100 as on April’1979. At irregular intervals, the BSE authorities review and modify its composition to make sure it reflects current market conditions. Sensex is calculated using free-float market capitalization method (Worth of company in terms of its shares is called market capitalization and worth of shares of the company which are available for trade on the stock exchange is called free-float market capitalization). Under this method, market cap of these 30 companies (used as the sample for the entire Universe, considered based on certain criterions) is calculated for those shares which are freely available in the market for trade. This figure is then prorated for the entire Universe to calculate Sensex.
