Increase in sensex index - What do they mean?

The index movements reflect the changing expectations of the stock market about future dividends of the corporate sector. The index goes up if the stock market thinks that the perspective dividends in the future will be better than previously thought. When the prospects of dividends in the future becomes pessimistic, the index drops. The ideal index gives us instant readings about how the stock market perceives the future of corporate sector. Every stock broadly moves due to two resons; news about the compnay or news about the economy (budget, etc.)

The job of an index is to purely capture the second part, the movements in the economy. This is achieved by averaging. Each stock contains a mixture of two elements - stock news and index news. When we take an average of returns on many stocks , the individual stock news tend to cancel out and the only thing left is news that is common to all stocks. The news that is common to all stocks is news about the economy. That is what a good index captures. The correct method of averaging is that of taking a weighted average, giving each stock a weight proportional to its market capitalization.

For eg. : Suppose an index XYZ contains 2 stocks, A and B. A has a market cap of Rs. 1000 cr. and B has a mkt. cap. of Rs. 3000 cr. Then we attach a weight of 1/4 th to movements in A and 3/4 to movements in B.

Similarly in Sensex, the 30 stocks have their assigned wightages.

So you see its a very dynamic process. At times you will hear .... Sensex has fallen by 9 % ( if its 10 % then there would be a 1 hr. market halt if the movement is before 1 : 00 pm. etc ... Its a market-wide circuit breaker ..... wont get into all that now) but say any other share has risen by 9 % .... u might get flummoxed ..... but the simple reason behind this is that those shares are not part of the Sensex and may rise despite the negative feeling of the traders ... there was no trickle down effect on this particular stock and it managed to rise by 9 % . It could be because of any reason ..... like the sale of various mill lands few months back in Mumbai led to the unbelievable intra day rise of share prices of Bombay Dyeing, IndiaBulls (which are not part of Sensex ) and other cos. which held a stake in these lands ...... over the months also few of the sectors which have shown a sharp increase in share prices despite the fluctuations in the SENSEX is sugar space (like Renuka, Ponni, Oudh, Bajaj (handled by Shishir Bajaj whose uncle Rahul is the Founder of Bajaj Auto but Shishir got the sugar industry aftr the separation between the brothers i.e rahul and Shishir's father), Auto space, IT sector , etc. Due to the tremendous performance of the BSE SENSEX ... more and more companies are filing for IPO ( Initial Public Offerings ) though it has slowed down a bit since the SENSEX crossed 10,000 and cos. became a bit more risk averse at high figures. IPO at a high SENSEX and at a time when the normal Indian had cash to invest , is a good idea. Many companies during this period stepped in ..... like NDTV whose IPO price was Rs. 100 but today is trading at around Rs. 220 mark ... then there is Reliance Communication (formerly owned by Mukesh but now by Anil) which opened at Rs. 200 and now trading at Rs. 440 + ...... and the list just goes on and on .... pyramid retail , INOX , and many other construction and entertainment cos (primarily).

But now rather than going for individual shares, smart investors are investing in mutual finds. SIPs (systematic investment plans) are the in thing right now. You have funds with hardly any entry or exit load and every other day some or the other co. used to come out with its own mutual fund ( dont tell me u missed the amazing marketing extravaganza at the launch of Reliance Mutual Fund) till a few months back. The future lies in the next step and that is ETFs (Exchange Traded Funds) .... these are mutual funds which shall be traded on the share market just as any other share and will still hav NAV (Net Asset Value) just like a normal mutual fund. US has many successful ETFs like SPDRs, QQQs, etc. will talk about mutual funds in detail some other time.

But as far as FIIs are concerned .... we are still a long way to go till we even reach to a 'visible distance' of where China is right now. Too much of talk goes on about India being close and all that .... but a long way to go ... yeah we are moving in the right direction but not fast enough. And whatever progress we have made hass been in the past 15 years since the famous Economic Liberalisation process of 1991. It was Manmohan Singh , under the PMship of Narsimha Rao who changed the picture of the Indian Economy. Today the fact that i am typing this post is coz Manmohan Singh the economist showed us the way. If he would not have taken those steps, the license raj would have continued and there would not have been any competition. Its because of the competition in each and every sector, because of the entry of foreign players that the local industries are improving. Its because Airtel was allowed to start mobile services, Hutch, TATA, Reliance and others were allowed that the state owned MTNL and BSNL woke up from years of sleep and strtd gud services such as broadband and triband. You need to shake up the system to see any kind of progress. You need to be as innovative as Grameen Bank in B'desh which had the belief that micro finance can change the rural system. It is these visions which win Nobel prize.

Source: Chango on PaGaLGuY.com