Know all you need to know about the National Stock market. You will get all the information about It’s history, purpose, its relevance and more …
Few people actually understand what and how Stock markets in India work. Before I go ahead and complicate things let me start with a story.
Once upon a time in a village in India, a man appeared and announced to the villagers that he would buy monkeys for Rs100/-
The villagers, realizing that there were many monkeys around the village, went out to the forest and started catching them. The man bought thousands of monkeys at Rs100/- and as the supply started to diminish, the villagers started stopping their effort. Soon the man further announced that he would now buy monkeys at Rs200/- this renewed the efforts of the villagers and they started catching monkeys again.
Soon the supply diminished even further and people started to go back to their farms. Soon the offer rate increased to Rs250/- and the supply of monkeys became so little that it took real effort to even see a monkey, let alone catch it! The man further announced that he would buy monkeys at Rs500! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers. ‘Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs350 and when the man returns from the city, you can sell it to him for Rs500’
The villagers squeezed up with all their savings and bought all the monkeys.
Then they saw neither the man nor his assistant, only monkeys everywhere!! !
History of Stock Markets in India –
During the 1850s, 4 Gujaratis and 1 Parsi stockbroker used to gather under a banyan tree in front of Mumbai’s town hall for trading. The number of brokers grew over the years and they eventually moved to a new location at Dalal Street. In 1875, 318 members joined this group by paying 1 Rupee each we call it the ‘Bombay Stock Exchange’ (BSE) today.
In 1986, BSE came up with a new concept called SENSEX (SENSitive indEX) to measure the performance of the stock markets. Before this, there was no precise scale to measure highs and lows of Indian stock market. Initially, Sensex was calculated based on a method called ‘Full Market Capitalization’. From 2003 onwards, ‘Free Float Market Capitalization’ method is being used.
How do you Calculate Sensex?
Here I’ll try to explain what these methods are and how Sensex is calculated with an example-
Let us assume that there are only 2 companies in the market- X & Y.
X has 250 shares out of which 200 are available for general public (called free floating shares) and 50 are owned by company management. Each share is valued at Rs200.
Now the total company value is = (total no of shares)* (each share value) = 250*200 = Rs50,000.
This is called total market capitalization of X.
On the contrary, Free float market capitalisation of X= (Free floating shares)*(share value) = 200*200 = Rs40,000
For company Y, say free floating shares are 150 and free float market capitalisation is Rs60,000.
Now the free float capitalization of entire market adds up to 1 lakh rupees (sum of X&Y).
We’re just one step away from calculating Sensex. Before doing that we need to know one small thing –‘BASE INDEX’.
Assume we’ve been indexing (calculating Sensex) this market (comprising of stocks X & Y) from past 10 years. On the first day of indexing, we found out that market value is Rs.10,000. We said that this amount of ten thousand is equivalent to 100 Sensex points. This is called Base Index (On the very first day BSE started indexing, Sensex was 100. Base index was made 100 just for ease of calculations.)
Now come back to calculating today’s Sensex. So market share is 1 lakh. If 10,000 is equivalent to 100 Sensex points then 1 Lakh is equivalent to 1000 Sensex points.
Next Day scenario- Company X is doing better and each of its shares is more by Rs 50. Now free float market capitalization is Rs 110000. So Sensex is 1100 points.
An increase in Sensex indicates that the overall economy of country is good and investors have faith in the growth story of the market. A decrease in Sensex over period indicates that all is not good for the economy.
Unlike our sample market (X and Y), which has only 2 stocks, BSE deals with 30 stocks and NIFTY with 50. Usually BSE is higher than NIFTY (27,887 and 8395 points respectively while writing this answer) because BSE deals with market giants which have higher market capitalisation.
The 30 Sensex stocks: ACC, Ambuja Cements, Bajaj Auto, BHEL, Bharti Airtel, Cipla, DLF, Grasim Industries, HDFC, HDFC Bank, Hindalco Industries, Hindustan Lever, ICICI Bank, Infosys, ITC, Larsen & Toubro, Mahindra & Mahindra, Maruti Udyog, NTPC, ONGC, Ranbaxy Laboratories, Reliance Communications, Reliance Energy, Reliance Industries, Satyam Computer Services, State Bank of India, Tata Consultancy Services, Tata Motors, Tata Steel, and Wipro.
Now, lets see how does Nifty and Sensex moves up or down?
Now as we saw above that Nifty comprises of top 50 companies and Sensex comprises of top 30 companies, so the movement in Nifty and Sensex is dependent only on these top 50 stocks and top 30 stocks respectively.
Nifty will not be affected by the movement of the company other than its top 50 companies and same way Sensex would not be affected by the movement of the company other than its 30 companies.
Now, if total market capitalization of these 50 stocks for Nifty goes up by 2% on a particular day then Nifty will move up by 2%
If total market capitalization of the 30 Sensex Stocks goes up by 1.5% on a particular day then Sensex would move up by 1.5%.
Same way, if market capitalization on some particular day decreases by 3% then the respective index would also go down by 3%.
Stocks of leading companies are usually listed in both these exchanges and are controlled by a board comprises of various people including brokers, government regulating authority and other people.