Indexes explained

Basic stock market info which advanced readers can skip.

Ever wondered why your portfolio goes up while the Sensex/NIFTY are flat? Or why your portfolio does not rise in sync with the market? It might be because you are comparing it with the wrong basket/index.

BSE Sensex: represents a basket of 30 Large cap shares
S&P CNX NIFTY: represents a basket of 50 large cap shares. (about 41% of the market volume and 56% of the total market capitalization
CNX Nifty Junior: 50 most liquid stock in the market (which are not part of the NIFTY) They represent about 9% of the market capitalization and 14% of the trading volumes.
CNX IT Index: index for 20 IT stocks (96% of the market capitalization and 91% of the transaction value)
CNX Bank Index: 12 top banks (74% of the trades, 79% of the market cap)
CNX 100: top 100 stocks(66% of the market cap and 56% of the trades) for all practical purposes you can consider it as a sum of NIFTY + Nifty Junior.
S&P CNX Defty: (used only by FII) it accounts for dollar fluctuations and the nifty fluctuations… basically the value of NIFTY stocks in USD.
S&P CNX 500: top 500 companies (90% of the stock market capitalization and 80% of all trades)
CNX Midcap: 100 midcap companies. (market capitalization of the range of 1000 to 5000 cr INR)
Nifty Midcap 50: 50 midcap companies.

Now the question arises how to choose the appropriate index:
1) See if your stock is a part of any index. If so, then that index is the best choice.
2) In case of the stock being in multiple index, then choose BSE over NIFTY and NIFTY over Bank/IT index.
3) If it does not belong to any index, then see which is the core area of business and fit it accordingly.
4) otherwise check its market capitalization. i.e.
a. if it is more than 5000 cr, then its best to put it with Nifty/Sensex.
b. if between 1k to 5k crore, then choose the midcap index.

5) If it is a small cap (<1000 cr) and does not fit in any sector index too, then as a rule of thumb expect the stock to give twice the return of Sensex/NIFTY. If it does not, then you are probably taking too much risk for no additional returns.

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8 thoughts on “Indexes explained

  1. it was expected… that is why on Friday I had asked Ram to continue to wait…
    my only problem was that i had bought a lot of shares this month.. and those are bleeding me to death….
    i have lost close to 70k in last 2 trading sessions….
    poor judgment on my part 😦
    but after the markets have bottomed out… i am going to go bullish big time.

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  2. me too but depends
    it could fall further after a minor pullback

    there is a lot of clearing of the mess that should happen
    as margin calls etc will have forced shut many broker terminals

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  3. The beauty is that Reliance Power would have sucked up all the liquidity from HNI, RII hence in a way enabling the bears to have a field day.

    //as margin calls etc will have forced shut many broker terminals//
    I did a stupid thing… usually when I buy big lots (as i did 10 days ago), I simultaneously buy put options of the NIFTY… that way I am index neutral for a couple of weeks. However I do not know why I did not adopt this strategy….
    Anyways on second thoughts, I am glad I did not have any derivatives during this crash.

    PS: I put up a quick post on Anil Ambani. but since i have not tracked his company ever (probably due to lack of fundamental strength) see if you could add more data to it.

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