Making Sense of the SENSEX

by Shweta Chopra

How many people actually understand what the ticker at the bottom of news channels actually means? Not many. It’s not uncommon to hear whining when a husband switches the channel from a dramatic soap to the news, just to check on this bizarre ticker. So why does he do so? For all the kids out there who are clueless – here’s making sense out of all that.

The tickers at the bottom of the screen essentially give us information on the BSE SENSEX and the Nifty. The BSE SENSEX is a stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange. The 30 companies are some of the largest and most actively traded stocks and are representative of various industrial sectors of the Indian economy. The Nifty 50, or simply the Nifty, is one of several leading stock market indices for large companies which are listed on National Stock Exchange of India. 

If that sounded like Greek to you, don’t worry: we are yet to understand what a stock exchange actually is.

The Indian Securities Contracts (Regulation) Act of 1956, defines a stock exchange as “an association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.” Securities are a form of ownership that can be easily traded on a secondary market like a stock exchange. Securities allow you to own the underlying asset without taking possession. For this reason, securities are very easily traded, or very liquid (that is, trading them doesn't involve the transfer of actual physical goods).

A stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.  It deals with shares, debentures bonds and such securities already issued by the companies. In short, it deals with existing or second-hand securities and hence it is called a 'secondary market.'

A stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities for trade in these securities to its members and to brokers. It regulates the trade activities to ensure free and fair trade. A stock exchange is a particular market place where authorised brokers come together daily and conduct trading activities. The prices of different securities traded are shown on electronic boards. After working hours, the market is closed. All the working of stock exchanges is controlled through computers and electronic systems. Stock exchanges are the financial barometers and development indicators of the economy of a country. Industrial growth and stability is reflected in the index of a stock exchange.

An index is a statistical measure that represents the value of a batch of stocks. Investors use this measure like a barometer to track the overall progress of the market. Two of the indices, of the Bombay Stock Exchange and the National Stock Exchange of India, are the SENSEX and Nifty, respectively.

This still doesn’t help us understand the numbers on the news tickers. Let’s take an example of a company that is listed on the SENSEX: ICICI Bank Ltd. The number mentioned alongside the name refers to its stock price. Stock price is the price of a single share of a company's stock, the ownership of which makes the possessor a shareholder of the company. It is also referred to as share price. Just like any normal commodity, the stock price rises when demand for the stock rises. People would want to buy more shares if they expected ICICI to do well and earn profits in the future and provide them with capital gains when they sell them. Conversely, the stock price falls when demand for the stock falls.

Now, on to the ticker. If mentioned in green, the stock price is rising and falling if in red. The figures are determined using complex statistical methods and models that are not particularly relevant for the average individual.

Thus stock prices serve a purpose similar to any other price and give us information on how well a company is doing, which to a great extent depends upon its current performance and tackling of issues. People will not expect a company that isn't able to pay its staff's salaries to earn huge profits. So only a sound and high-performing company will be expected to be a high-performer in the future as well – which is reflected by a rising price on the stock market index.

News tickers allow us to keep track of how well those stocks are doing. Investing in shares of companies is an extremely risky venture, but one that can also be highly profitable. A lot of people have become rich overnight, with companies they are shareholders in earning huge profits and providing its shareholders with high returns and capital gains. However, stories of people losing everything in a matter of minutes also exist.

The stock market indices are also very important indicators for how well the economy as a whole is doing. An economy is essentially growing when there are high rates of saving, investment,  and production. Ample demand for the goods being produced also indicates a growing economy. As a result of which, a majority of the population is employed in productive activities. When the stock market index reflects that most stock prices are falling and the market as a whole is in the red, it means that demand for the stock of most companies is falling. This means that the companies are probably facing difficulties and people don’t expect the companies to do well in the future, either.

Lack of confidence in a company leads to that company’s sales and profits falling. It makes them curtail production and sack workers with the fall in production requirements. Thus people lose their jobs and don’t have enough income to generate sufficient demand in the economy. This lowers demand furthers, and also negatively affects the demand for other products, resulting in a downward spiral. Such a situation is referred to as a recession. The stock market index is a very useful indicator of such a recession or of a boom (when the economy is doing very well and growing).

So whether or not you plan to invest in the stock market, the indices like the Nifty and SENSEX can give you important insights into how the economy as a whole is doing. It is important to keep track of such things as the economy and its functioning has a tremendous impact on our day-to-day lives, from the price of onions to petrol. Hopefully the next time you switch to a news channel, those numbers will not scare you off and instead will give you a small insight into how the Indian economy is performing.