Have you heard about Fortune 500 – you most probably have. Anyone working in the corporate world would know it. This is the annual list published by the magazine – of the top 500 businesses. This is how a stock market index would work, too – it will give you insights and overall trends of the capital markets and sentiment of the investors in a specific stock, and more. Let us understand this a little more in-depth.
What is an Index of the Stock Market?
A stock market index is a statistical metric that shows how the stock market is changing. A few similar types of equities are picked from among the securities currently listed on the exchange and grouped together to construct an index.
The type of industry, market capitalization, or company size could all be factored in-stock selection. The underlying stocks’ values are used to calculate the stock market index’s value. Any change in the underlying stock values has an impact on the index’s overall worth. The index will rise if the prices of most of the underlying securities rise, and vice versa.
In this approach, a stock index represents overall market sentiment as well as the direction of product price movements in financial, commodities, and other markets, for example – The Sensex index.
What is Sensex?
Benchmark of the Bombay Stock Exchange in India is known as the Sensex. The Sensex index is made up of 30 of the BSE’s largest and most actively traded stocks, and it serves as a barometer for the Indian economy. It is a market capitalization-weighted and float-adjusted. The Sensex is re-evaluated twice a year, between June and December.
The Sensex is India’s oldest stock index, having been established in 1986 by Standard & Poor’s (S&P). Analysts and investors use it to track India’s economic cycles as well as the growth and decline of specific sectors.
How are the Stocks of Sensex Decided?
Every stock in the SENSEX is included following thorough due diligence, ensuring that only high-quality stocks are included in the index. In fact, companies must meet the following five criteria in order to be considered for inclusion in SENSEX.
- It needs to be listed on BSE – The company must be listed on the Bombay Stock Exchange; if it is not, it will not be included in the SENSEX index.
- It should be a large or medium-sized Business – To be eligible for inclusion in the SENSEX, a company’s market capitalization must be in the large-to-mid range. Only the best and largest companies are included in this ranking as a result of these criteria.
- Shares should have a high level of liquidity – A stock must be liquid so it can be considered for inclusion in the SENSEX. It indicates that buying and selling that particular stock should be simple. Because liquidity is a function of the underlying business’s quality, it also serves as a filtering criterion.
- Substantial Money should come from core operations – The company’s core business activities should generate a significant amount of revenue. There are many companies that have been classified into various sectors based on their basic operations and the type of business they operate in.
- Sector Weight of the Company – Another crucial criterion is sector balancing. Every sector has a weight assigned to it, which represents the economy for any given index. Financial services.
Well, now, if you feel like you would like to invest in the stocks of Sensex – here is a way to get it done.
How to Invest in the Stocks of Sensex?
As you can see, the SENSEX is made up of India’s best firms, and if you purchase the SENSEX – you would also become a part-owner of these incredible businesses. You can now easily invest in SENSEX in one of two ways.
1) Directly through Stocks: You can begin investing directly in the SENSEX’s constituents and the weighting they have in that index. This means you can acquire stocks in the quantity that corresponds to the stock’s weightage.
2) Through Mutual Funds: Investing in index mutual funds is a superior way to invest in the SENSEX. These funds are index replicas, meaning they have a portfolio that is identical to the indexes. As a result, a SENSEX index fund will have the same 30 equities as the SENSEX.
How Will You Know if You are Picking the Right Fund?
You must choose an index fund with a larger amount of assets under management (AUM). During a liquidity constraint, it can handle the unexpected redemption pressure of significant investors. You’ll need to choose an index fund with a low expense ratio. The expenditure ratio is the cost of operating the fund, and a lower expense ratio means a higher overall return over time.
The tracking error of an index fund, which is the difference in returns between the index fund and its target stock market index, must be examined. It could be related to the index fund’s cash balance and mutual fund expenses. To minimize divergence from the benchmark index, you should invest in an index fund with a reduced tracking error.
Investing in a fund from the index is always a good idea – given the number of insights and credibility you would get. But, though the stock is listed on the index – make sure you have done your part in the research.