What are the Sensex & the Nifty?
The Sensex is an quot;indexquot;. What is an index? An index
is basically an indicator. It gives you a general idea
about whether most of the stocks have gone up or
most of the stocks have gone down.
The Sensex is an indicator of all the major companies
of the BSE.
The Nifty is an indicator of all the major companies of
If the Sensex goes up, it means that the prices of the
stocks of most of the major companies on the BSE
have gone up. If the Sensex goes down, this tells you
that the stock price of most of the major stocks on the
BSE have gone down.
Just like the Sensex represents the top stocks of the
BSE, the Nifty represents the top stocks of the NSE.
Just in case you are confused, the BSE, is the Bombay
Stock Exchange and the NSE is the National Stock
Exchange. The BSE is situated at Bombay and the NSE
is situated at Delhi. These are the major stock
exchanges in the country. There are other stock
exchanges like the Calcutta Stock Exchange etc. but
they are not as popular as the BSE and the NSE.Most
of the stock trading in the country is done though the
BSE & the NSE.
Besides Sensex and the Nifty there are many other
indexes. There is an index that gives you an idea about
whether the mid-cap stocks go up and down. This is
called the “BSE Mid-cap Index”. There are many other
types of indexes.
There is an index for the metal stocks. There is an
index for the FMCG stocks. There is an index for the
automobile stocks etc. If you are interested in
knowing how the SENSEX is actually calculated...you
must check-out our quot;How to calculate BSE SENSEX?quot;
But, before we go ahead and try to understand quot;How
to make money in the stock market?quot; you MUST read
the next page....
How to calculate BSE SENSEX?
This article explains how the value of the “BSE
Sensex” or “sensitive index” is calculated. If you are
not sure what we mean by the Sensex or what the
Sensex is all about, you can find this out by reading
our “How to make money in the stock market?”
The Sensex has a very important function. The Sensex
is supposed to be an indicator of the stocks in the BSE.
It is supposed to show whether the stocks are
generally going up, or generally going down.
To show this accurately, the Sensex is calculated
taking into consideration stock prices of 30 different
BSE listed companies. It is calculated using the “free-
float market capitalization” method. This is a world
wide accepted method as one of the best methods for
calculating a stock market index.
Please note: The method used for calculating the
Sensex and the 30 companies that are taken into
consideration are changed from time to time. This is
done to make the Sensex an accurate index and so
that it represents the BSE stocks properly.
To really understand how the Sensex is calculated, you
simply need to understand what the term “free-float
market capitalization” means. (As we said earlier, the
Sensex is calculated on basis of the “free-float market
capitalization” method) But, before we understand
what “free-float market capitalization” means, you
first need to understand what “market capitalization”
Next - What is quot;market capitalizationquot;? >>
How to make money in the stock market?
This article is a COMPLETE guide to the basics of
making money in the stock market! If you are
considering investing in the stock market, you MUST
read this article! We have explained all the concepts
and talked about all the quot;mythsquot; that people have
about the stock market!
What are stocks? Definition:
Plain and simple, a “stock” is a share in the ownership
of a company.
A stock represents a claim on the company's assets
and earnings. As you acquire more stocks, your
ownership stake in the company becomes greater.
Note: Some times different words like shares, equity,
stocks etc. are used. All these words mean the same
So what does ownership of a company give you?
Holding a company's stock means that you are one of
the many owners (shareholders) of a company and, as
such, you have a claim to everything the company
This means that technically you own a tiny little piece
of all the furniture, every trademark, and every
contract of the company. As an owner, you are entitled
to your share of the company's earnings as well.
These earnings will be given to you. These earnings
are called “dividends” and are given to the
shareholders from time to time.
A stock is represented by a quot;stock certificatequot;. This is
a piece of paper that is proof of your ownership.
However, now-a-days you could also have a “demat”
account. This means that there will be no “stock
certificates”. Everything will be done though the
computer electronically. Selling and buying stocks can
be done just by a few clicks.
Being a shareholder of a public company does not
mean you have a say in the day-to-day running of the
business. Instead, “one vote per share” to elect the
board of directors of the company at annual meetings
is all you can do. For instance, being a Microsoft
shareholder doesn't mean you can call up Bill Gates
and tell him how you think the company should be run.
The management of the company is supposed to
increase the value of the firm for shareholders. If this
doesn't happen, the shareholders can vote to have the
management removed. In reality, individual investors
like you and I don't own enough shares to have a
material influence on the company. It's really the big
boys like large institutional investors and billionaire
entrepreneurs who make the decisions.
For ordinary shareholders, not being able to manage
the company isn't such a big deal. After all, the idea is
that you don't want to have to work to make money,
right? The importance of being a shareholder is that
you are entitled to a portion of the company’s profits
and have a claim on assets.
Profits are sometimes paid out in the form of
dividends as mentioned earlier. The more shares you
own, the larger the portion of the profits you get. Your
claim on assets is only relevant if a company goes
bankrupt. In case of liquidation, you'll receive what's
left after all the creditors have been paid.
Another extremely important feature of stock is
quot;limited liabilityquot;, which means that, as an owner of a
stock, you are quot;not personally liablequot; if the company is
not able to pay its debts.
In other legal structures such as partnerships, if the
partnership firm goes bankrupt the creditors can come
after the partners “personally” and sell off their
house, car, furniture, etc. To understand all this in
more detail you could read our “How to incorporate?”
Owning stock means that, no matter what happens to
the company, the maximum value you can lose is the
value of your stocks. Even if a company of which you
are a shareholder goes bankrupt, you can never lose
your personal assets.
Why would the founders share the profits with
thousands of people when they could keep profits to
themselves? This is the obvious question that comes
up next. This what the next section is all about!
Next - Why do companies issue stocks? >>
What is quot;market capitalizationquot;?
You probably think that you have never heard of the
term “market capitalization” before. You have! When
you are talking about “mid-cap”, “small-cap” and
“large-cap” stocks, you are talking about market
Market cap or market capitalization is simply the
worth of a company in terms of it’s shares! To put it in
a simple way, if you were to buy all the shares of a
particular company, what is the amount you would
have to pay? That amount is called the “market
To calculate the market cap of a particular company,
simply multiply the “current share price” by the
“number of shares issued by the company”! Just to
give you an idea, ONGC, has a market cap of
“Rs.170,705.21 Cr” (when this article was written)
Depending on the value of the market cap, the
company will either be a “mid-cap” or “large-cap” or
“small-cap” company! Now the question is, how do
YOU calculate the market cap of a particular company?
You don’t! Just go to a website like MoneyControl.com
and look up the company whose market cap you are
interested in finding out! The figure in front of “Mkt.
Cap” will be the market cap value.
Having seen what market cap is and how to find out
the market cap of a particular company, let us try to
understand the concept of “free-float market cap”