Sensex and Nifty explained: what India's market indices measure

The Bombay Stock Exchange (BSE), set up in 1875, is Asia's oldest stock exchange. Its index, the Sensex, was first published in 1986, with 1978-79 as its base year and a base value of 100. The National Stock Exchange (NSE) began trading shares in 1994, and its Nifty 50 was introduced in 1996, with 3 November 1995 as its base date and a base value of 1,000.

Index points are not rupees, so the size of a move depends on the level. If the index stands at 75,000, a fall of 600 points is 0.8 per cent. Percentages, not points, are what let you compare one day or one year with another.

Each company's weight depends on its free-float market capitalisation: the share price multiplied by the number of shares actually available for the public to trade, which leaves out the holdings of promoters and other long-term holders. The index is the combined value of its companies divided by a number called the divisor, scaled to the base value.

The divisor is adjusted whenever something changes the total for reasons other than market prices, such as a company being replaced, a stock split or a rights issue. This is what keeps the index from jumping when nothing has happened to investors' wealth. The exchanges review the list of constituents twice a year, and a company can be dropped if it no longer qualifies on size, liquidity or free float.

Because the indices are weighted by size, a handful of large banks, software companies and energy groups can account for most of the movement. If those heavyweights rise while a majority of the other constituents fall, the index can still finish higher. For this reason, market reports also give the number of advancing and declining shares, which shows how broad a move was.

The composition changes the character of an index over time. A heavy weight in financial companies, for instance, makes the index sensitive to interest rates and credit growth. Equal-weight versions of the Nifty exist for investors who want each company to count the same.

The Nifty Next 50 follows the next largest companies after the Nifty 50, and the Nifty Midcap and Smallcap indices follow smaller ones. The Nifty Bank index follows the major banks and is quoted on its own because derivatives trade heavily on it. The India VIX is a different kind of number: it measures how much movement the options market expects over the next 30 days, and is often called the fear gauge.

Look for the percentage change rather than the points, and for whether the figure is the close or a number during the day. A record high is a nominal record, which prices in no inflation, so a long-run comparison should consider both. Price indices also leave out dividends; total return indices include them and are the fairer yardstick for long-term returns.

Index funds and exchange-traded funds that track these indices let investors own a slice of the whole basket at low cost, but the index itself is only a measure. As with every guide on Plax, this is general information, not advice on what to buy or sell.

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