Last Updated on August 28, 2021 by srikanta
You must have heard that Sensex goes down 20 points below or Nifty went up 50 points from many sources like news papers on Television and must have wondered what is all this about. What this Sensex and Nifty indicates? Why people are following it so much ?
If you are a stock market person, then you might have known it. But if you are a curious person or a new to market person and don’t know a single thing about this then read this blog. Here we have tried to explain it in the simplest term. So let’s start the blog.
Example to understand it simply……
Before going into the term let me give you an example which will help you understand this easily. Probably you know that before the declaration of the result of an election; news channels show us the exit poles data. Some time the exit pole data is correct and sometime it may differ from actual result. So what is this exit pole data and how these are prepared? And why it is shown??
Well to sum up, exit pole is prepared by surveying a small sample of population. People are surveyed randomly and their data for which candidate they have casted their vote is collected. It is shown to give you a brief idea about on which side the result is going on. And as it is prepared by surveying a small population only; this may be correct or wrong from time to time.
So why Sensex and Nifty is required???
In Indian Stock Market around 4000 companies are listed. Now a person interested in investing in the stock market can not check price and status of all these companies everyday but he/she needs a general idea about where the market is going that is if the companies are rising up of falling down. So the person depends upon the sensex or Nifty.
Sensex or Nifty is basically just like the exit pole which tries to predict the overal sentiment or direction of market over the survey of a small sample. Sensex is having 30 companies and Nifty is having 50 companies under it. Based on these companies both Sensex and Nifty predicts the market’s – direction. Many a time it happens that where ever these 30 or 50 companies goes the the market also moves in that direction because these are the biggest companies available and they posses the power to control the market. But it is not necessary to occur every time like this. Therefore one cannot blindly trust the Nifty and Sensex index.
How does these are made?
Till this we know that Sensex has 30 big companies and Nifty has 50 big companies to make their prediction. Now let’s take sensex into account where 30 companies are surveyed to give the the index according to free float market capitalisation.
So Sensex include those 30 companies in it which have maximum free float market capitalisation in India from different sectors. Based on the movement of these companies the Sensex index is fluctuated. Nifty also works exactly like sensex except that it has 50 companies inside it.
Surely Sensex and Nifty helps us saving time because we can track the market movement easily by comparing the present day index with previous day but one cannot blindly follow this as it has some limitations.
Sensex or Nifty doesn’t take the biggest 30 or50 companies into consideration; rather it takes into account the companies which have higher free float market capitalisation.
For example let Company ‘A’ has 100 crore market capitalisation but the free float market capitalisation value is 40 crore.
Let another company ‘B’ has 70 crore market capitalisation and it’s free float market capitalisation is 60 Crore which is available for public in the market. In the above case company ‘A’ is bigger than ‘B’ but company ‘B’ will be consider over ‘A’ for Nifty or Sensex indexing because ‘B’ is having higher free float market capitalisation. So we can confirm that Sensex Wisty doesn’t show us the clear picture of market.
We can not predict the movement of a market consisting of 4000 companies just by observing or sampling 30 – 50 companies. Therefore it cann’t be acurate every time.
If the present 30 or 50 companies which are being taken into consideration does not perform well in future then there share value will decrease as a result other company will take over them based on their free float market value. Thus Sensex or Nifty index increases after a certain period where as market value for some companies are decreasing. The change in the companies or review is done in every 3 months.
As Nifty and Sensex are consists of biggest companies of the country, many a time they perform well and index goes on increasing but other companies below them may not perform well. We may get null or void figures sometime because it represents the Winner companies always.
Now you may be thinking that if 30 or 50 companies are taken in Sensex or Nifty then why not every people invest in those companies only? This is because Nifty and Sensex include these companies based on their past performance i.e. peretormance in past 3 month. And once they are included in Nifty or Sensex means they are the biggest companies in the country right now and the price of their shares will be sky high. Also who knows whether they will stay in top 30 or top 50 spot for the future or not.
Golden rule for stock market is not to run behind the winner; One must identity the winner before it is the winner.
Hope we have been able to make you understand some basics about Nifty and Sensex. If yes please comment and like our Fb page to stay updated.