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Whether Boom or doom, educated or the normal trader the word Sensex and NIFTY have become the daily mantra.Since the last few years the value has more than doubled and the last one year it has plummetted at the same speed. The devastating days of September 2008 are now a distant memory. A year on from Lehman, Indian companies are back to raising money and industrial production is climbing up.

As animal spirits return with a vengeance and the market starts to get its daily doses of greed, investorsand traders are keeping a close watch on the Sensex. But trying to track the future direction of the market is an arduous task. Upswings and downswings-the rollercoaster ride can be challenging.

During the last few months, the Sensex gained in 14 of the 20 session and added 1,461 points, or 9.3%, to 17,127. Brokers and dealers admitted that much of these gains came on the back of liquidity, the inflow of money from abroad.Let us understand about the concept of stock market index and the main indicators such as Sensex and NIFTY.

Importance of Stock market index

On a day to day basis the media speaks about the Sensex movement. Let us understand this important measurement. At the outset let us understand that any good stock market Index reflects the behaviour of Equity Markets as a whole. A good stock market Index should efficiently reflect the underlying universe that it represents.Thus it serves as a good investment benchmark for portfolio managers,FII's and retail investors.A stock market good index is genrally considered as a reflection of economy.

Sensex - The Barometer of Indian Capital Markets

Introduction

Sensex, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of Sensex was taken as 1978-79. Sensex today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology.

Since September 1, 2003, Sensex is being calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs.

In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the fancy of the investors. Sensex has captured all these happenings in the most judicious manner. One can identify the booms and busts of the Indian equity market through Sensex. As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards). Thus Sensex has become one of the most prominent brands in the country.

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* Contributed by: -
Prof. M. Guruprasad is Senior Faculty for Economics, Finance and Research, with AICAR Business School Raigad / Mumbai. He has more than 15 years of experience in research and educating / training management students. He was research scholar with the University of Mumbai. Worked as Executive in the Marketing research industry. Also Conducted Workshops and Training programmes. He has published articles in various industry magazines, newspapers and has initiated many discussions on academics.