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Sensex FAQ - Part1
Posted Date: 14 Mar 2008 Resource Type: Articles/Knowledge Sharing Category: Education
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Posted By: vijay Member Level: Bronze
Rating:  Points: 5
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What is the Sensex?
It stands for Sensitive Index of the Bombay Stock Exchange. This is a statistical measure that serves as an indicator for the performance of 30 select companies registered for trading in the Bombay Stock Exchange.
Deepak Mohoni, a market strategist in India came up with the abbreviated term "Sensex" in 1990 and it has been used by almost everyone in India, ever since.
What does it mean when the "sensex" goes up/down?
Each of those stocks has a price. This mean is assumed to be normally distributed (as explained above).
When the mean, after trading, compared with that before trading is higher, that means the sensex has gone up. If it goes down, the opposite happens. Well, it is not this simple and a lot more mathematics goes into it - but this is the basic idea.
What does the term "Value Weighted Index" mean? Is there another index as well?
The above normal distribution and changes in it can be calculated in two ways.
1. Each company is given equal weightage and the changes in the curve are effected only by the price change - i.e. whether the company with the highest market capitalization gains a rupee or the one with the lowest among the 30 does, the index would increase by the same value. This is called a price weighted index - The American Dow Jones Industrial Average is an example of this.
2. Each company is weighted according to the market capitalization and changes in the curve are thus reflective of both the size of the company and price increase. BSE follows this method.
What is does market capitalization mean?
Market Cap = Total Number of Shares in the Market * Price of each share.
Is the Stock Market Index a perfect reflector of the health of the national economy?
No. As you can see, the index is a mere statistic that indicates demand for the ownership of 30 select companies. Assuming this would mean a bigger wallet for your family is stupid.
Does it have no relation to the economy at all?
Since the demand is shaped by the health of the companies and since the companies fall in a broad spectrum, it is one of the factors that "can" indicate that there is good overall demand in the local economy. Though generally true, good demand does not necessarily imply a great economy. And local demand alone does not lead to ownership of stocks.
Is the index an indicator of demand in the local economy alone?
No, Especially not in this era of 'globalized trade'. Demand for ownership in stock market in India is quite often driven up by FII.
Who/What are FII?
FII = Foreign Institutional Investors.
A typical example would be German Pension Funds investing in the Indian Stock Market. As a consequence of their investment, the index would obviously go up. Though the German investor’s act can be seen as a consequence of their reading of the Indian market, which would be no different from that of an Indian Pension Fund, the difference is that the supply/demand is not locally generated. Also, such FII's being who they are, happen to be big investors. Consequently, the effect of their decisions to withdraw is huge as well. This builds a lot of risk to the market - risk which is magnified.
Is the government justified in taking credit for high indices?
It is not the business of the government to bother about the ownership of individual citizens or private institutions. What is even more stupid is people(citizens) taking pride in such high numbers.
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