Demystifying SENSEX. Review on General Tips on Sensex

Everyday you must be reading in the newspapers and watching on TV that how Indian stock market are going great guns and SENSEX is reaching new levels everyday. You must have also heard stories of people making fortunes in the share market and must be feeling tempted to invest in the market and make a quick buck. In the following paragraphs I have tried to explain whatever little I understand about the SENSEX and share market and I hope it would be of some help to you guys.

is the common name for the Bombay Stock Exchange Sensitive Index. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. We have a counterpart of Sensex called that is an index of prices of a group of fifty stocks listed on the National Stock Exchange(NSE). The basic idea of both the indices is same as to capture the general mood of the Indian stock market though the methodologies and calculation involved in arriving at index numbers are different in two cases. But SENSEX is more popular as it has been in existence for a longer period of time than NIFTY so we normally take SENSEX as the benchmark for Indian stock market. NIFTY and SENSEX are called broad based indices as they are designed to reflect the movement of the entire market. So ideally speaking they should move in the same direction. There are other indices like BANKEX or NIFTY JUNIOR that are designed to reflect the movement of the specific sector or industry.

Broad based indices like SENSEX should capture the general business environment and not confined to a particular sector so a fair representation is given to all the major sectors of the economy while constructing a broad based Index. Within a sector companies with large market capitalization(share price* total no. of shares) and large trading volumes are preferred in an index because Index is a reflector of the economy and as market leaders these companies are in the best positions to reflect the ups and down of the sector. Also companies large market capitalization and large trading volumes in the INDEX mitigates the risk of manipulation of stock prices and demand supply mismatch making the INDEX a true reflector of the general business environment in the economy.

So when an INDEX like SENSEX is going up it means that on average Indian companies are doing well or/and expected to do well in future, but it no way suggests that all the companies are doing well. Also if a particular sector e.g. Information & Technology is doing well it does not necessarily mean that each and every company of the sector is doing well because there are other factors specific to company which affects the financial performance of the company.

So in nutshell the historic high levels of SENSEX is only reflecting that Indian economy in general and Index stocks in particular are expected to perform better and not necessarily XYZ Ltd which your broker/friend asking you to buy citing SENSEX as an indicator. You should buy XYZ Ltd only if you or your trusted investment advisor strongly feels that the prevailing share price of the company is less that the actual value of the company taking into account its future growth.

India has become a preferred destination for lot of foreign funds and lot of foreign money is coming into India which is taking SENSEX into new heights and a there is a lot of frenzy into the market and even general public have started taking interesting share market. This is perfect timing for dubious promoters and brokers to plant false stories about their companies and create volumes in their shares to lure the innocent investors like you and me to buy the shares of their companies that are not worth even the paper on which they are printed. So one should be extra cautious before investing into share markets and even if you want to invest, it would be advisable to invest through mutual funds.

I hope this review will help you in one way or another. Waiting for your comments so I can edit the review.