Friday, 21 August 2015

What are Sensex and Nifty Indexes

Sensex and Nifty are the stock market indexes, constructed and managed solely by the Bombay Stock exchange and the National Stock exchange, respectively. Both the BSE and the NSE are two different stock exchanges in the Indian Financial System.

CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL).  IISL is India's first specialised company focused upon the index as a core product. IISL is a subsidiary of the NSE.

Sensex is an index comprising of the best 30 stocks, among some 5000 stocks listed on the BSE. 

Nifty is an index comprising of the best 50 stocks, among some 1500 stocks listed on the NSE.

These 30/50 stocks are taken from 23 different industries operating in the Indian economy, based on parameters defined by the Exchange, managing the index. These parameters include:

- Liquidity;
- Market Capitalization;
-Floating Stock, etc

Taking only "Liquidity" as a parameter, for our understanding purpose, means, if the stock of a company is in the Nifty index, it would mean that the liquidity of that stock is on the higher side in the market, or in other words, it is a very liquid stock because of high volumes.

The idea is to represent the overall mood of the market on a given point of time via these best selected 30/50 companies. Anyone can look up at the index and conclude about the sentiment in the market for that particular time and day. The inherent motive is to capture the overall behavior of the equity markets by taking in to account the averages, based on weights assigned to these selected stocks, in the Index.

There are several other indexes in addition to the commonly known Sensex and Nifty. Various indexes operating in NSE are:

a. Bank nifty (comprising of Banking stocks)
b. CNX IT (Information Technology Companies' Like the TCS, Infosys etc)
c. CNX Nifty Junior (group of second most liquid stocks)
d. CNX Midcap (Midcap companies)
e. CNX Small Cap, etc (Small Cap Companies)

These indexes are useful for the following reasons :

1. Indexes are the lead indicators of the overall sector or the economy as a whole;

2. Indexes are used as a benchmark against which performances are measured of various equity funds;

3. one can compare the historical returns generated by different investment instruments like commodities, debt etc  and the equity investments;

4. An Index, in itself, is used as an underlying for the derivatives market, allowing a trader to trade in the Index Futures and Options market. Also allowing Investors and Money Managers good hedging tools and instruments for their investments.

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