What are BSE and NSE?
BSE is short for the ‘Bombay Stock Exchange’. Founded in 1875, BSE is the first and one of the largest securities markets based out of Bombay in India. NSE is short for the ‘National Stock Exchange’. Founded much later than BSE in 1972, and offers a country-wide stock market similar to BSE. While BSE is older, NSE is larger with a greater number of daily trades occurring on it and a higher turnover rate.
What are Sensex and Nifty?
While BSE and NSE are stock markets, both Sensex and Nifty are stock market indices. A stock market index statistically summarises the movements of the market in real-time. A stock market index is created by selecting similar kinds of stock from a market or exchange and grouping them together. Sensex, which stands for ‘Stock Exchange Sensitive Index’, is the stock market index for the Bombay Stock Exchange. It calculates the movement on BSE. Nifty stands for ‘National Stock Exchange Fifty’ and is the index for the National Stock Exchange.
Types of Stock Market Indices:
There are a variety of stock market indices in India. These are the notable ones you might have heard of before:
Benchmark Index:
The principal metric of viewing market movements as it indicates the performance of the whole market. It is a comparative statistical measure meaning it displays the amount earned by the average fund on the market versus the amount it should have earned. eg: BSE Sensex, NSE Nifty (Nifty 50).
Broad Market Index:
They are benchmark indices, but tend to corroborate more stocks into the index. eg: BSE 100. BSE Sensex aggregates the movements of 30 biggest financially sound Indian companies listed on BSE. BSE 100 does the same for the top 100 biggest companies.
Market Capitalization Index:
An index where companies’ components are measured with respect to the total market value (capitalization) of their outstanding shares. eg: BSE Smallcap, BSE Midcap
Sectoral or Industry-based Index:
Giving benchmarks and summaries of the performance of stocks in certain industries like healthcare, energy, industrial goods, technology, etc. CNX IT, Nifty FMCG Index.
Significance of a Stock Market Index
Stock market indices like BSE and Sensex serve to succinctly depict the condition of the market. They help investors discover patterns in the market. The following reasons are why the stock market index is necessary for investors:
Helps You Pick The Right Stocks:
Within a single share market, there are thousands of companies listed. It seems intimidating and tedious to discover, among this large number, which is the right stock to invest in. Without a benchmark index, it is difficult to differentiate between two stocks, and sorting them is near impossible. A stock market index combats this problem by serving to differentiate between stocks. It classifies the shares of companies based on industry type, size, financial impact, and so on.
Convenient Metric for Beginners:
Equity investing can be high risk especially for beginners who are ill-informed. While learning about the stock market through courses, or with the help of an expert is recommended, it might prove impractical for some people as it is a time-consuming process. At times like this, the stock market index like BSE Sensex and NSE Nifty bridges the knowledge gap between beginners and experienced investors with a simple depiction of trends in the market.
Reflects Sentiments of Investors:
Another major reason stock market indices are invaluable is because they summarise the daily sentiments of investors trading on them. For example, during times of political upheaval, certain stocks start underperforming which suggests that investors are uncertain or nervous about new reforms, mandates and the like. Understanding the underlying sentiments shows investors whether a trend is short-term or set to last.
Passive Investment:
Passive investment is when an investor will replicate the stocks in a high-performing index by investing in a similar portfolio of securities. It is called passive investing because it is quicker, requires less research, and multiple stocks in a portfolio are bought in a single click. The replica portfolio’s returns should resemble the returns shown by the index. For instance, suppose your portfolio resembles that of NSE Nifty. When NSE Nifty earns 7% returns, you will likely get 7% in returns from your portfolio as well.
Conclusion
Sensex and Nifty are essential to buy and sell stocks on BSE and NSE respectively while using your trading account. There are a variety of indices that summarise stock performance based on sector, company size, and other features. Indices help to pick stocks faster, discover the underlying sentiments of investors, and aid in convenient passive investing.
Another important step to take before you begin your trading journey is to open trading account. For those who are unaware of the meaning of a trading account, an online trading account allows one to access BSE and NSE to buy or sell stocks using the stock market indices like Sensex and Nifty as their guide. Once you’ve opened your trading account, you can trade with relative ease and flexibility. Happy trading!