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What is an Index? What is Nifty and Sensex? 

what is an index | marketfeed

You may have often heard news channels speak about Nifty50 or Sensex. Monitoring both of these helps investors and the general public analyse the stock market’s direction and a country’s economic conditions. In this article, we will discuss what a stock market index is and what Nifty50 and Sensex are.

What is an Index?

An index simply means an indicator, sign, or measure of something. It is a number that measures or indicates something. A stock market index is used to measure the performance a specific group of stocks or stocks belonging to a particular sector. It provides a snapshot of how the overall market or a particular sector is performing. Essentially, it helps investors analyse the pulse of the stock market.

What is the Purpose of an Index?

The economic growth of a country is measured using various indicators like gross domestic product (GDP), employment rates, etc. A stock market index also acts as a barometer or indicator of an economy by reflecting the collective performance of stocks of listed companies. When an index rises, it suggests optimism, economic growth, and positive investor sentiment. On the other other, a decline may indicate caution, economic challenges, or a more pessimistic outlook.

An index provides insights into the overall health of the stock market, allowing investors, analysts, and policymakers to measure economic conditions, trends, and potential risks. As a result, it becomes a key tool for decision-making, helping people make informed choices based on the prevailing economic climate.

NSE has around 2,000 listed companies, while BSE has around 5,000 listed companies. So it’s practically impossible to look at the performance of all these stocks daily. Therefore, we use an index. This index represents the performance of the constituent stocks in the index.

What is Nifty50?

Nifty50 is the benchmark index of the National Stock Exchange (NSE). It represents the top 50 companies listed on the NSE. When Nifty50 rises, it indicates that the prices of the underlying stocks are generally increasing, and vice versa. Click here to learn more about the constituent companies.

What is Sensex?

Sensex is the benchmark index of the Bombay Stock Exchange (BSE). It represents the performance of 30 well-established and financially sound companies listed on BSE. Click here to learn more about the constituent companies.

Why are Stock Market Indices Important?

  • Indices offer a quick overview of whether the market is bullish (rising) or bearish (falling).
  • Investors use indices as benchmarks to evaluate the performance of their portfolios against the broader market. An investor can aim to beat the benchmark set by the index while investing for the long term. 
  • Indices help investors diversify their investments by offering exposure to different sectors.
  • Movement in indices reflects the economic conditions and trends in specific industries.
  • They provide insights into investor sentiment and confidence.
  • Indices also serve as the basis for other investment products such as ETFs and Index funds.

How Are Nifty50 and Sensex Calculated?

We know that NIFTY50 comprises the top 50 companies on the NSE. The value of Nifty50 is calculated using a complex formula that involves the price of the stocks and their free-float market capitalization. In simple terms, the level of the index reflects the total market value of all the stocks included in the NIFTY 50, relative to a particular base period.  NSE has fixed November 3, 1995 as the base period, which marks the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1,000, and a base capital of Rs 2.06 lakh crore.

A similar formula is applied to calculate BSE’s Sensex, but it involves only the top 30 companies.

How Are These Companies Selected?

For calculating Nifty50 and Sensex, their respective exchanges have complex criteria for selecting constituent companies. The Nifty50 undergoes semi-annual rebalancing, while the Sensex is rebalanced on a monthly basis. When a company falls out of the criteria, it will be swapped out by another new company that falls within the criteria. 

To learn more about how stocks are included/excluded in NIFTY50, click here.

What Are Sectoral Indices?

We saw that NIFTY50 can be used to measure the stock market performance of the Indian economy. NIFTY is calculated based on market cap, or we can say that it is a broad-based index. Similarly, indices can be made based on sectors, which are termed sectoral indices. A sectoral index represents the top companies in a specific sector such as IT, Pharma, Metal, Auto, etc. The performance of different sectors can be measures using such indices. 

Nifty Pharma is a sectoral index of NSE which represents the performance of top pharmaceutical companies in the country. Similarly, there are 11 sectoral indices in the NSE that represent various sectors of the economy. 

Just like NSE has various sectoral indices, BSE also has different indices that represent various sectors of the country.

In conclusion, a market index is an invaluable tool for investors in many ways, such as a benchmark for their investment portfolios and knowing the state of a country’s economy. These indexes can represent the top companies in the country, and companies in different sectors, segments, and asset classes. If used correctly, an index could be your best friend to make investment decisions.

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What is The Difference Between NSE and BSE?

What is Stock Market?

A stock exchange plays a crucial role in facilitating the buying and selling of financial securities/instruments between investors and traders. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the leading stock exchanges in the Indian market. These exchanges operate under the rules and regulations set by the Securities and Exchange Board of India (SEBI), an authoritative body dedicated to safeguarding investor interests and fostering the growth of the Indian stock market. Read on to learn more about the difference between NSE and BSE!

What is Bombay Stock Exchange (BSE)?

The Bombay Stock Exchange (BSE) was established way back in 1875. Located on Dalal Street, Mumbai, it is the oldest stock exchange in Asia. There are more than 5,400 companies listed on the BSE. Its benchmark index, the S&P BSE Sensex, is widely tracked by investors across the globe. The Sensex (Sensitive Index) tracks the performance of 30 of the largest and most actively traded stocks on the BSE. As of 2020, BSE is the 10th largest exchange in the world in terms of the cumulative market capitalisation of all companies listed on its platform.

What is National Stock Exchange (NSE)?

The National Stock Exchange (NSE) was incorporated in 1992. It is also located in Mumbai. NSE is ranked the third-largest stock exchange globally in terms of the total number of trades in equity shares. There are more than 1,600 companies listed on the NSE. It is the first exchange in India to implement electronic or screen-based trading. The Nifty 50 is NSE’s benchmark index that represents the weighted average of 50 of the largest companies listed on its platform.

What are the Differences Between NSE and BSE?

Both NSE and BSE provide a platform for companies to raise funds efficiently. The exchanges allow investors to trade in equities, currencies, debt instruments, derivatives (F&O), and mutual funds. Moreover, they provide services such as risk management, clearing and settlement, and investor education. 

Basis of DifferenceNSEBSE
BriefNational Stock Exchange is the biggest stock exchange marketplace in India. They introduced the fully automated, electronic, and screen-based trading system in India.BSE or Bombay Stock Exchange is the oldest and the first stock exchange, not just in India but in the whole of Asia. They offer high-speed trading for their customers.
Number of Companies ListedNSE has nearly 2100 companies listed on it.BSE has about 5300 companies listed on it.
Benchmark Indices NSE’s benchmark index is the Nifty 50, which is based on the market capitalization of top 50 companies. BSE’s benchmark index is the Sensex, which is calculated based on the market capitalization of 30 companies. 
Derivates ContractNSE has a higher market share in the derivatives market than BSE with a market share of about 94%.BSE has a comparatively lower market share in derivatives with nearly 6%. 
Liquidity Of all the Indian stock markets, NSE has the greatest average daily turnover for equity shares.Low liquidity in comparison to NSE.
Products Offered Equity, Mutual Funds, Exchange-Traded Funds, Corporate Bonds, Initial Public Offering (IPO), Offer for Sale, and also Equity, Currency, and Commodity Derivatives.Equity, Mutual Funds, Exchange-Traded Funds, Security Lending & Borrowing Schemes, Corporate Bonds, Initial Public Offering (IPO), Institutional Placement Program (IPP), Offer for Sale, and also Equity, Currency, and Commodity Derivatives.

Which is better, NSE or BSE? 

While we cannot state specifically which is better, the choice will ultimately depend on your investing and trading styles/preferences. NSE is the preferred exchange for intraday, swing, and derivatives trading due to high liquidity. If you are a long-term investor, it does not matter where you buy/sell shares. However, BSE gives access to more than 5,000 stocks across various sectors. There could be a minor difference in the prices of stocks in NSE and BSE. The costs related to investing and trading are similar for both exchanges.

In conclusion, the investor’s profile ultimately determines which stock exchange they choose among the NSE and BSE. The NSE may be preferred due to its bigger trading volume, cutting-edge technology, and wide range of product offerings, while the BSE offers advantages due to its historical relevance and several specialized markets. Investors should carefully choose which exchange best fits their profile by evaluating their investment objectives, risk tolerance, and specific needs.

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Editorial

The Great Indian Stock Market Bubble

The Indian stock market is in a bubble. Markets crashed frightfully in March 2020 in a matter of days due to Covid-induced lockdowns that were imposed around the world. However, things escalated quickly when SENSEX and NIFTY, the two important benchmark indices, hit their all-time high in less than a year’s time. When one looks around, one finds that many businesses have gone bust, people have lost jobs, and that the COVID-19 pandemic is throwing a tantrum, even in developed nations. Governments across the world have given out fiscal stimulus packages, and interest rates have been eased to get money flowing in the economy.

The stock markets are at a historic high, and something doesn’t feel right about it. A big question arises here: are the stock markets in a bubble? Can there be a crash bigger than last time?

How Did We Get Here?

Firstly, when the lockdown struck in March 2020, we saw a steep fall in markets globally, including India. India had to recover from the economic impact of the COVID-19 pandemic, where we saw businesses suffering, high unemployment, and increased healthcare costs. 

The Indian Government and the Reserve Bank Of India (RBI) gave out fiscal and monetary stimulus. Fiscal stimulus is when the government distributes money and resources to the public through moratoriums, loan rebates, and government transfers. Transfer of cash directly to the account of farmers is an example of fiscal stimulus. Monetary stimulus is when the RBI cuts interest rates or buys government bonds from the public. This reduces the cost of borrowing money. A low interest rate on loans encourages the public to borrow money and set up businesses or invest it. 

To sum it up, the main aim of the government was to induce cash into the system and encourage economic activity at the same time. The money in the system did go into businesses, but a huge chunk of it went into stock markets as well. Moreover, during the peak of the lockdown, in order to generate income, many retail traders sitting at their homes started investing. More than a crore demat accounts were opened between April 2020 and January 2021. 

Huge amounts of money that were pumped into the economy found their way into risky assets like stocks. Additionally, the impact of it can be seen on high inflation rates in the country. 

The Price To Earnings Ratio (PE Ratio)

A crucial indicator to know if the stock market is overpriced is the PE Ratio of NIFTY 50. The PE Ratio or Price To Earning Ratio is calculated as the price of the share divided by Earnings Per Share or EPS. EPS is essentially the profit generated by the company divided by outstanding shares of the company. A high PE ratio is a sign of an overpriced share. A low PE ratio is a sign of an undervalued share. 

For the 50 companies comprising the NIFTY 50 index, the median PE ratio has been 20.34. Historically, NIFTY crashed or tanked whenever the PE ratio of NIFTY went between 25-28.  In March 2021, the PE ratio of NIFTY was 42. That is an insanely large number.  In July 2021, the PE ratio of NIFTY was still above 28.

Even though the stock markets are overvalued, if the companies start posting equally good earnings, the valuation of the markets will be justified. A good profit translates to a good EPS for a company. If the EPS increases, the PE ratio automatically starts going down, indicating normalcy. 

The Warren Buffet Indicator

The Market Capitalization to GDP Ratio or the Warren Buffet Indicator is another metric that indicates overpriced markets. India’s Market Cap to GDP ratio is at a 13 year high of 115%. This means that the stock market is bigger than the nation’s GDP. In layman’s terms, there is too much investing and trading as compared to too little economic activity. However, in countries like the US, the market cap of listed companies has been almost 1.99 times bigger than the GDP. Yet for a country like India, such a Market Cap to GDP ratio isn’t justified if we compare it to other developing nations. 

Foreign Investor Vs Domestic Investors

FII stands for Foreign Institutional Investors. Whereas, DII stands for Domestic Institutional Investors. Foreign Investors do not get sufficient returns by investing in already developed countries like the US, Canada, UK, etc. They instead prefer investing in developing countries like India in hope of a higher return. 

After the global markets crashed in March 2020, FIIs turned towards India as an investment opportunity looking at its booming stock market. In FY21, FIIs invested close to Rs 65,000 crores in India. The only time India witnessed FII outflows in FY21 was in April and September. Whenever FIIs withdrew, DIIs would jump in and save the market from falling. The reverse was true as well.

A strong flow of investment from Foreign Investors was a key reason for such high market valuations. FIIs have constantly been withdrawing since April 2021. Between April 2021 and July 2021, FIIs withdrew close to ~Rs 30,000 crores from Indian capital markets. 


The question is, when are Foreign Investors going to withdraw from Indian Markets? The answer could lie in ‘Taper Tantrum’. To know more about Taper Tantrum, click here.

What Lies Ahead

Another phenomenon is the IPO Boom. In case you haven’t noticed, most IPOs that came during the pandemic gave listing gains. Listing gains refer to when the share price jumps up on the first day the shares get listed. This could be because the companies might be deliberately underpricing their IPOs in order to gain investor attention.

Stock markets crash when investors withdraw money suddenly from the markets because of an apparent risk or volatility in the market. The last time investors withdrew money, the lockdown had just been imposed and economic activity had ceased completely.

Inflation rates are high. Globally, governments are looking to increase interest rates in order to curb inflation. Higher interest rates imposed by the Fed in the US or RBI in India can stimulate a market crash. Although, this is just a possibility. One should watch out for changes in policy by global economies. 

Do you think we are headed for a market crash anytime soon? You can let us know in the marketfeed app available exclusively for Android and iOS.

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What are Blue Chip Stocks?

Blue Chip Stocks | marketfeed

You may have come across many social media posts or videos of stock market experts encouraging everyone to invest in blue chip stocks. Whether you’re a beginner or an experienced investor, it’s always a good idea to hold blue chip stocks in your investment portfolio. In this article, we will discuss what blue-chip stocks are, their characteristics, and a few related topics.

What are Blue Chip Stocks?

Blue-chip stocks are shares of well-established, financially stable, and reputable companies that have a history of delivering consistent performance. These companies are typically leaders in their respective industries. The term “blue chip” was originally derived from poker, where blue chips have the highest value.

Blue Chip companies are also known for paying out regular dividends to their shareholders over time. Most of them generate stable returns for investors and are known to have much lower downside risk in times of recessions, inflation, and economic downturns.

For example, State Bank of India (SBI) is a blue-chip public sector banking company.

Characteristics of Blue Chip Stocks

Blue-chip stocks are known for their reliability and stability in the stock market. They are so reliable that these stocks have a considerably high weightage in stock market indices. Here are some of the characteristics of blue-chip stocks:

1. Financial Stability

Blue-chip companies are financially strong and reliable. They have healthy balance sheets, stable revenue streams, and strong cash flows. This makes them less likely to face financial distress or bankruptcy.

2. Market Leaders or Dominants

Blue-chip companies are often leaders in their respective industries or sectors. They have a dominant market position and a competitive advantage over their rivals.

For eg, HDFC Bank is a leader in the banking sector, while TCS and Infosys are leaders in the Information Technology (IT) Sector.

3. Longevity

Bluechip companies have a history of operating successfully for many years, sometimes even for decades or centuries. These companies have demonstrated their ability to adapt to changing market conditions, including recessions.

4. Dividend Payments

Since blue-chip companies are financially strong and have stable cashflows, they usually pay regular dividends. Therefore, blue chip stocks can create a passive income stream for investors.

5. Low Volatility

Volatility refers to the rate at which the price of a stock increases and decreases. High volatility represents high risk. Blue chip stocks tend to have low volatility and are considered low-risk investments. They are less prone to sharp price fluctuations in the market.

6. Large Market Capitalisation

A company’s market capitalisation is used to evaluate and rank its size and value in the stock market. Blue-chip companies have a high market cap. You can calculate the market cap of a company by multiplying its current stock price by the number of outstanding shares.

7. Brand Value

The majority of the blue-chip companies have well-known brands and distinguished products. Customers typically choose products with more brand value than those with none. For eg, ITC Ltd and Hindustan Unilever Ltd operate FMCG brands that are preferred by many customers across India.

8. Global Operations

Many blue-chip companies have a global footprint. They conduct business and generate revenue from various regions around the world. This global diversification can help mitigate risks associated with regional economic fluctuations.

9. Resilience in Economic Downturns

Blue-chip companies can withstand recessions and economic downturns. Although the business of these companies will be affected, it will not be as severe as that of smaller companies. Their financial strength and brand value contribute heavily to this characteristic.

Long-Term Growth Potential

Blue chip stocks are considered safe investments due to their exceptionally strong financial health and stability. They may have survived difficult challenges and market cycles over the years. These companies are market leaders and well-positioned in the market. Although they will be stable, they might not have the potential to provide investors with multibagger returns as they are already established companies.

However, this does not mean that blue-chip companies will never fail. The collapse of Lehman Brothers and General Motors in the 2008 Economic Recession is proof that even the seemingly strongest companies might fail under extreme stress.

Blue Chip Companies in India

Some well-known examples of blue-chip stocks include:

  1. Reliance Industries – India’s largest business group; has interests in energy, petrochemicals, natural gas, retail, telecom, mass media, and financial services.
  2. Tata Consultancy Services (TCS) – A multinational information technology services and consulting company.
  3. HDFC Bank – India’s largest private sector bank.
  4. Infosys Ltd – A multinational information technology company.
  5. Hindustan Unilever Ltd – A British-owned Indian consumer goods company.
  6. Coal India – A central public sector undertaking under the ownership of the Indian Govt’s Ministry of Coal.
  7. Wipro Ltd – A multinational corporation that provides information technology, consultant and business process services.
  8. Maruti Suzuki – Market leader in India’s passenger vehicles segment.

Blue Chip Stocks vs. Growth Stocks

Blue-Chip StocksGrowth Stocks
Shows stability and resilience during economic crisisHigh growth potential
Market leadership and dominanceLow market share (the company is in the growth stage)
Diversified revenue streamsMay only have a single line of products
Regular dividendsLimited or no dividends
Strong financial performanceFinancials may be focused on development and not stability
Long investment horizonShort investment horizon

Why Invest in Blue-Chip stocks?

The stock market can be volatile— it can unexpectedly show some drastic movements in either direction. Thus, it is advisable to invest a decent portion of your capital in blue-chip stocks. A few of the reasons why you should invest in blue-chip stocks are given below:

  • Helps in reducing risk because blue chip firms endure economic downturns. 
  • Can create a passive income source as most blue-chip stocks pay dividends regularly.
  • They help diversify your portfolio by reducing risk.
  • The unsystematic risk (risks affecting a whole sector) in these stocks is very low.
  • They can give very high returns during favourable economic conditions.
  • As these stocks are well-known to people, liquidity in these stocks is very high. That means they can be bought and sold whenever you want at a fair price.
  • Blue-chip stocks are a robust and safe pick for long-term investment.

Evaluating Blue Chip Stocks

Evaluating blue chip stocks is similar to how you would analyse any company. One must know fundamental analysis and also the knowledge on how to apply them effectively. The basic framework on how to analyse these companies is as follows:

1. Identify the Stocks – select stocks with high market capitalisation.

2. Understand the Business

3. Ensure Quality

4. Check Valuation

5. Make a Decision

You can read our detailed article on how to identify quality stocks for the long term here.

Blue Chip Indices

In the Indian stock market, the benchmark indices of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) can be used to evaluate the performance of blue-chip stocks. Nifty50 is the benchmark index of NSE, while Sensex is the benchmark index of BSE.

The Nifty50 constitutes the top 50 companies from various sectors with high market cap listed on the NSE (along with other eligibility criteria). Sensex constitutes one of the top 30 stocks listed on the BSE and has similar selection criteria. You can easily track the performance of blue-chip stocks using these indices.

Blue-chip stocks represent some of the most established and reliable companies in the stock market. They are characterised by financial stability, market leadership, and a history of consistent performance. While they may not provide rapid growth, they are known for their resilience and ability to generate long-term returns. Investing in such stocks can be a wise choice for those seeking stability and income in their investment portfolios.

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RBI Keeps Repo Rate Unchanged at 4% – Top Indian Market News

RBI keeps Repo Rate unchanged at 4%; raises GDP projection for FY21

The Reserve Bank of India’s Monetary Policy Committee (MPC) has left the Repo Rate unchanged at 4%. The Reverse Repo Rate also remains unchanged at 3.35%. This is the third time in a row that the rates have been kept on hold. The RBI expects the GDP to contract 7.5% in the year ending March 2021. Thus, it has revised its earlier expectation of a 9.5% contraction. The MPC expects inflation based on the Consumer Price Index (CPI) to be at 6.8% in Q3 and 5.8% in Q4.

Read more here.

Covid-19 vaccination drive to begin soon after scientists’ approval: PM Modi

Prime Minister Narendra Modi, on Friday, said that India will begin its Covid-19 vaccination programme after experts give the necessary approvals. He was addressing an all-party meeting to discuss the Covid-19 pandemic situation in India. PM Modi said, “experts believe that the wait for a Covid-19 vaccine will not be long and it may be ready in a few weeks”. He also stated that the Centre and state governments are conducting discussions to fix the price of the vaccine in India.

Read more here.

Sensex crosses 45,000 mark for first time as RBI revises GDP target to -7.5%

The BSE Sensex crossed the 45,000 points mark for the first time on Friday, after the RBI announced its optimistic stance on India’s economy. The RBI revised the real GDP growth projection for FY21 from -9.5 to -7.5. Shaktikanta Das, the RBI Governor, also stated that the central bank expects the economy to record positive growth in the second half of the current financial year.

Read more here.

Zydus Cadila gets DGCI approval for Phase-3 clinical trials with biological therapy

Zydus Cadila has received approval from the Drugs Controller General of India (DGCI) to start Phase-3 clinical trials with its biological therapy ‘PegiHep’ in Covid-19 patients. The company had completed Phase-2 clinical trials with PegiHep last month. The Phase-3 trials will commence in December and will be conducted on 250 patients across 20-25 centres in India.

Read more here.

DBS Bank India gets Rs 2,500 crore capital support from parent company

DBS Bank India Ltd (DBIL) has received a capital infusion of Rs 2,500 crore from DBS Bank Ltd, Singapore, to support its amalgamation with Lakshmi Vilas Bank (LVB). The scheme of amalgamation came into effect on November 27, 2020. The lender stated that the amalgamation provides stability and better prospects to LVB’s depositors, customers, and employees, after a period of uncertainty.

Read more here.

Govt extends NMDC’s Donimalai iron ore lease after two-year suspension

The Government of India has signed an agreement with the Government of Karnataka and the Ministry of Steel to extend the Donimalai iron ore lease. NMDC stated that this decision by the government has been taken in a situation when steel companies are facing a shortage in the supply of iron ore. NMDC’s Donimalai had remained non-operational since 2018 after NMDC and the Karnataka Government got into a legal battle over the asset. 

Read more here.

RBI raises limit for contactless card transactions to Rs 5,000 from Jan 1

The Reserve Bank of India (RBI) has proposed to increase the limit for contactless transactions from Rs 2,000 to Rs 5,000 from January 1, 2021. This covers contactless and recurring payments through debit and credit cards, prepaid instruments, wallets, and the Unified Payments Interface. This move is to expand the adoption of digital payments in a safe and secure manner.

Read more here.

Tata Power gets letter of intent for 2 Odisha discoms

Tata Power Ltd announced that it has received the Letter of Intent (LoI) for Odisha’s WESCO and SOUTHCO power distribution utilities (discoms). The LoI has been issued by the Odisha Electricity Regulatory Commission (OERC). The license enables Tata Power to serve the consumers of the western and southern part of Odisha with a geographical spread of more than 47,000 sq km each. The license period for the two distribution utilities will be 25 years.

Read more here.

Burger King India IPO subscribed 157 times on final day of bidding

The Rs 810 crore initial public offering (IPO) of Burger King India was subscribed 157 times on the final day of bidding. This makes it the second most successful IPO of 2020, after Mazagon Dock Shipbuilders. The allotment status will be announced on December 9, and the shares will be listed on the stock exchanges on December 14.

Read more here.

SAIL crude steel output grows by 7% in November

Steel Authority of India Ltd (SAIL) said that its crude steel production rose by 7% to 1.417 million tonnes (MT) during November. The company had produced 1.328 MT of crude steel in November 2019. SAIL stated that it has taken a number of initiatives towards increasing its sales in both domestic as well as export markets.

Read more here.

JSW Steel offers Rs 450 crore to close deal with Bhushan Power: Report

As per a report from CNBC-TV18, JSW Steel has proposed to raise its offer by Rs 400-450 crore for Bhushan Power and Steel Ltd (BPSL), in a bid to close the acquisition at the earliest. The report states that JSW Steel wants to close the deal as soon as possible to take the benefit of rising steel prices. The company had initially offered Rs 19,350 crore for BPSL under the bankruptcy process and was declared the highest bidder almost a year back.

Read more here.