SENSEX is index for Bombay Stock Exchange of India. In broader term it represents how well/bad Bombay Stock Exchange is doing.
Suppose someone asks you what is the condition of market today. Are prices rising or falling? Now in order to answer that you will need current prices of stocks and prices that were a day before. Now you will simply calculate that how much a stock has risen/fell. Now you will do this for all the stocks and after some calculations you can tell that majority of stocks are at higher/lower prices than yesterday. You can even tell by how much % the stocks have risen/fell. But this method is cumbersome and there is smart way by which we calculate the conditions of market (i.e. its performance relative to yesterday or a month before.)
To calculate the SENSEX we take market prices of 30 biggest companies in India(for e.g. SBI, Reliance, ONGC, BHEL,Infosys etc.). Now the weighted mean is taken of these prices. (More weightage is given to company which has largest market cap or in simple terms which make more money in its business. ) When SENSEX was started on Jan 1, 1979 the weighted mean at that time was represented by 100. So the number (like 18000) will tell you nothing, what really important is how the numbers are changing. Thus you can say that from 1979 our market has nearly grown by 180 times (currently SENSEX is at around 18000). If this number is rising it means we are good and companies are making money and if it is falling it means that something is bad either with economy or companies(This is very generalized version, in reality there are too many factors that governs the SENSEX).
Why this Index (SENSEX) is important?
Now let us see how SENSEX helps us-
Suppose someone asks you what is the condition of market today. Are prices rising or falling? Now in order to answer that you will need current prices of stocks and prices that were a day before. Now you will simply calculate that how much a stock has risen/fell. Now you will do this for all the stocks and after some calculations you can tell that majority of stocks are at higher/lower prices than yesterday. You can even tell by how much % the stocks have risen/fell. But this method is cumbersome and there is smart way by which we calculate the conditions of market (i.e. its performance relative to yesterday or a month before.)
To calculate the SENSEX we take market prices of 30 biggest companies in India(for e.g. SBI, Reliance, ONGC, BHEL,Infosys etc.). Now the weighted mean is taken of these prices. (More weightage is given to company which has largest market cap or in simple terms which make more money in its business. ) When SENSEX was started on Jan 1, 1979 the weighted mean at that time was represented by 100. So the number (like 18000) will tell you nothing, what really important is how the numbers are changing. Thus you can say that from 1979 our market has nearly grown by 180 times (currently SENSEX is at around 18000). If this number is rising it means we are good and companies are making money and if it is falling it means that something is bad either with economy or companies(This is very generalized version, in reality there are too many factors that governs the SENSEX).
Why this Index (SENSEX) is important?
Now let us see how SENSEX helps us-
- Comparing Markets - By seeing the rise and fall in the indexes you can easily compare the different markets (like NASDAQ etc.) This is very helpful for investors who invest all over the world, they can easily select the market with potential for higher growth. You can also compare economies of the countries with indexes. A rising economy will show rise in index. But again this is very broad comparison and economy depends on other things also.
- Indicator to Economy- SEMSEX also show us how our economy is doing. If SENSEX is growing then we can say that economy will grow in future.
- As an investment tool- SENSEX comes in very handy while deciding for investment. By seeing fluctuation in SENSEX you can estimate how much market will grow etc.
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