Sensex & Nifty

There are thousands of companies listed on both NSE and BSE. So if someone asks you, how did the stock markets fare today, what would be your response?

Thats were "Indexes" come to your rescue. Sensex or Sensitivity Index is nothing but a value weighted index. It comprises of 30 stocks which are most actively traded in the BSE. Similarly, Nifty comprises of 50 actively traded stocks on the NSE.

The guys managing NSE and BSE make sure that the stocks which are selected for these indexes represent all the major sectors of the economy. They also review these stocks at periodic intervals and make changes if necessary. So if a new stock is traded very actively then it gets to replace one of the less actively traded stock in the index. Thats what happened when DLF replaced Dr Reddy's. Similarly, if a stock loses flavour then it is removed out of the index (Satyam was thrown out of index when the fraud came to light and its now replaced by Sun Pharma).

The final thing about the index is that they have something called a base year. The base year for Sensex is 1979, at which time the value of Sensex was 100. Today the Sensex is around 11,000. So in simple terms it means that the value of stock markets have increased by roughly 110 times over the last 30 years. Isn't it too much?

Hmmm.. not exactly. We have seen greater heights. We were at around 21000 during our peak in the beginning of 2008.