It can be like driving through a maze without any lights on these days. There’s so much financial jargon floating around that it can be easy to leave you scratching your head. The term “Sensex” is a term that is frequently used during a discussion on the stock market. However, what is Sensex, really? Fear not! This easy-to-follow guide will keep you up to speed on this key area of the stock market and enable you to invest more intelligently.
What is Sensex?
So many times we’ve got to start at the beginning. The “Sensex” (Sensitive Index of the Bombay Stock Exchange) is a kind of stock market index at the Bombay Stock Exchange. It is a tracking mechanism of top 30 companies listed on the Bombay Stock Exchange (BSE). These companies are the most financially sound and largest companies in India. If you ever come across people talking about the Sensex, then they’re really talking about the performance of these top companies – sort of like judging the health of a whole country by the performance of a sample of its citizens.
To put it simply, when we say the Sensex is up or down, we are hinting at the movement of these key companies’ stocks. What is Sensex? It tracks the top 30 BSE companies. If there is an increase in the Sensex, the general trend of these companies’ performance is good, and if there is a decrease, it is bad.
How is Sensex Calculated?
Okay, you have a point there, I suppose, many of you may think to yourself: “How do they get that number?” Fitting question! The Sensex is computed on the basis of free-float market capitalization formula. This would imply that the shares that are available for trading are taken into account and the calculations would be more reflective of the actual market scenario.
If there are 1,000 total shares of a company with 800 being on the market (the remaining 200 could be held by insiders or previous investors), the calculation is made based on the 800 shares in the market. The Sensex is then calculated by taking the average of all the companies’ performance, with the price of the shares considered. This means that it provides a good idea of the market’s position.
Why is Sensex important?
You may be wondering why should it matter if the Sensex is doing well or bad? The point is that, if you are thinking of investing, be it in stocks directly or indirectly, through an Exchange Traded Fund (ETF) or something else, you can use the understanding of Sensex to understand the overall mood of the market.
The trend of the Sensex tends to be the same when investor sentiment is high. Conversely, if the index is declining, it can be a sign of economic troubles ahead or investor apathy. For investors who want to make smart investment decisions, it is important to closely monitor the Sensex.
The impact of Sensex on your investments
Suppose you have decided to invest directly in stocks or even be a part of an ETF. The Sensex can be useful in determining the buying and selling points. When the Sensex reaches a record high, it may be tempting to get in the game. But keep the following old saying in mind: “What goes up will come down.” Timing is crucial in investing.
Sensex may give you direction, but don’t overlook the research you need to do on the companies you wish to invest in. Look for companies that have solid fundamentals. Some stocks may be lagging even in the good times of the Sensex.
ETF is a fancy acronym that can be confusing.
ETF is an exotic term and can be misleading.
ETFs can be a bewildering idea for many new investors. So what is an ETF? In simple words, it is equivalent to a stock basket from which the stocks can be purchased in one go. And the best part? ETFs in some of them are directly tracking the Sensex and the value of these ETFs depends on the performance of the companies which are included in the Sensex.
Let’s explain this further: When Sensex rises, so do the ETFs in general that tracks the Sensex. This is a perfect investment vehicle for individuals who wish to have stock market exposure without needing to purchase individual stocks. After gaining a sense of the way the Sensex works, investing in an ETF may make sense.
Myths and Misconceptions about Sensex
Then, let us take a peep at some common misconceptions that are generally believed by the common masses about Sensex. The biggest misconception is that Sensex is a reflection of the overall economy. It is a measure of the top 30 companies but not necessarily all industries and sectors. The Sensex does not cover a number of sectors.
One of the misconceptions is that every time the Sensex rises, it is good for investors. But in fact, when the Sensex goes up, it can sometimes be a sign of an overbought market, that may cause a pullback in the prices of the stocks. Always remember, just because the Sensex is high doesn’t guarantee profits in your investments.
How Frequently Check Sensex?
When it comes to stock markets, regular updates can help you get addicted. Are you monitoring the Sensex on a daily basis? Weekly? There is no “right” answer since it depends on your investing strategy. For investors with a longer time horizon, it is not a worry if there are fluctuations from day to day. Don’t be concerned with short-term movements, but look at the general trend over time.
It’s however sensible to watch the Sensex closely if you’re more of a day trader. However, be careful not to get carried away and make trades on a daily basis because this can cause big losses. Balance is key!
Conclusion: Sensex is a Powerful Tool
So if you are looking to invest in the stock market, it is important to know about Sensex, be it you are a beginner or an experienced trader. That’s a huge factor in deciding where to put your money. The Sensex can give you a feel of the market but do your own research on the companies and industry you are interested in.
So no more confusion on Sensex right? Apply your new knowledge to your investing journey! It doesn’t matter what approach you take – whether you buy individual stocks or a diversified portfolio like a mutual fund or exchange traded fund (ETF) – the basic rule of investing is information and choice based on sound investing principles. Happy investing.
