With the arrival of the new year, comes the fun, enthusiasm, and resolution. It is surveyed that about 64% of the population gets the gym membership and oaths to stay motivated and healthy throughout the year.
This becomes very common and appreciated. Do you wonder how this estimation of such surveys is made? Do you think is it possible to gather the choice of interest of the entire population easily? It is quite a time-taking and confusing at the same time.
The technique that they use is Sampling, It is a method of statistical analysis in which a predetermined number of observations are taken from a larger population.
I understand it is confusing and boring. How is Sampling related to the stock market? I am pretty sure you have heard of Sensex and Nifty. They are related to sampling in the stock market.
There are millions of companies registered and double the millions of stock, so keeping a record of stock performance and data is quite troublesome. For that, a sample of stock is taken to represent the performance of the whole stock.
This method of sampling for the stock market record is Index. The value of the same is calculated by the stock price as per the sampling.
What Is An Index?
Stock Index or Stock Market Index, is the statistical measurement of changes taking place in the stock market. Certain stocks are stacked taking similar securities listed in the stock exchange this way it is created. The size of the company, their market capitalization, or type of industry is the criteria of selection.
Fluctuation of the prices of the securities underlying gives the index value overall. Index and prices are dependent on each other, if the price goes high, the index gets too. Similarly, if the price is down, the index gets down too.
Why Do We Need Stock Market Indices
To know the indices, one must have to get the mood and sentiments of the market. This gives the stock indices. If you are an investor, it is advisable to get the flexibility of indices and decided the right time and right stock to invest in to get better returns.
Not only is allow investors to get into the stock when in time but this helps to get a comparison from the other investors and stock behavior. Outperformed and underperformance is taken out with the signs of indices. If there is higher stock than the index, it is outperformed. On the other hand, if the stock is lower then indices become underperformed.
This results in the stock market giving the performance and idea of how to invest according to the curve. Passive investment, that investing in a portfolio in securities that resembles closely the index also gets through this stock indices. This helps to cut down expenditure in research and selection of equities with the help of passive investment.
Types Of Indices In The Indian Stock Market
There are a few types of indices in the Indian Stock Market as follows:
- BSE Sensex and NSE Nifty: Benchmark indices.
- Nifty 50 and BSE 100: Broad-based indices.
- BSE Midcap and BSE Smallcap: Market-capitalization-based indices.
- CNX IT, Nifty FMCG, Nifty Bank Index, S&P BSE Oil, and Gas, so on: Sectoral indices.
There are also board-based indices such as thematic indices in the stock market further.
What Is Sensex?
The term Sensex you might have heard many times while going on through the stock market. Let us understand what is Sensex? Two-word combination, Sensitive and index act as the brain of stock indices. It consists of the 30 largest and most active stocks on the Bombay Stock Exchange (BSE).
These stocks are from the biggest companies and huge sectors of the economy of India. The BSE Sensex was introduced first on 1st January 1986 is the heart rate of the Indian Stock Market.
How Is This Sensex Calculated?
You had enough information about the stock indices and Sensex, Now let us know how it can be calculated. They are figured out by the free-flow method. This is related to the shared proportion amount that can be traded.
After which, the market capitalization of 30 companies whose stock is traded is calculated. Again after which BSE determines the free-float factor. This helps in determining the free-float market capitalization and after which the ratio-proportion method is used on the base index of 100 to come at the value of Sensex.
SENSEX = (Total free float market capitalization/ Base market capitalization) * Base Index Value
What Is Nifty?
Let us understand this other often used word, Nifty. What is Nifty exactly? It is the index of the National Stock Exchange(NSE), which is popular in the Indian Stock Market.
It is also known as Nifty 50 as it is a collection of 50 stocks. Indian Index Services and Products Ltd. (IISL) manages Nifty.
How Do We Calculate Nifty?
Just the way Sensex is calculated by the consideration of the free-float market capitalization-weighted method. The formula is as follow:
NIFTY = (Current Market Value/ Base Market Capital) * Base Index Value
In the following case, the index is 1000.
What Are BSE And NSE?
Knowing the words specifically for the stock market is important. BSE and NSE are important terms to understand closely. Bombay Stock Exchange is stated as Asia’s oldest stock exchange. It was established in 1875. BSE is marked as the key to the development of India’s capital market and allows investors to trade in a wide range of financial keys like equities, derivatives, mutual funds, and currencies.
NSE or National Stock Exchange is the other popular exchange in India founded in 1992. It also offers to trade in equities, derivatives, and mutual funds just the way BSE does. NSE is the first in the country to provide an automated, screen-based electronic trading system. It functions with National Securities Depository Limited(NSDL) that allows investors to electronically hold on or share stocks.
Bottomline
Now that you are well-versed with all the important terms related to Stock indices, anyone who talks about Sensex and Nifty’s market rate can relate. If you hear Sensex going 100 points and so you can now calculate the outcome through the above formulas.
