Stock Market Basics | BSE Sensex and the NIFTY, Bombay Stock Exchange

Index

Introduction to the BSE or Bombay Stock Exchange
How did the Bombay Stock Exchange come up
What is the BSE SENSEX
Importance of the BSE Sensex
The distinction between Large-cap, mid-cap, and small-cap companies listed on the exchange
SEBI- The role of a Regulator to BSE, NSE
Myth-busters and facts about the stock market and the Index
Essential steps towards investing in the stock market
Conclusion

People in India, who live in Mumbai, erstwhile Bombay, have most probably heard about the BSE or ‘The share bazaar’ as it is known in some parts of the country. Five thousand-odd companies are listed on the BSE.

The National Stock Exchange or NSE is another exchange in India which has around 1600 companies listed with it. The NSE came up in the year 1992.

How did the Bombay Stock Exchange come up?

The year was 1852. A group of 5 stockbrokers came together to discuss stocks and analyze companies. Their meetings usually took place under a banyan tree, situated in front of the Mumbai Town Hall. As the number of stockbrokers started increasing, they had to find a more suitable venue to conduct their regular meetings. Thus, began the construction of what is today the biggest stock exchange in India. BSE came up in 1875 and situated in the Phiroze Jeejebhoy towers in Dalal Street in Mumbai.

What is the BSE SENSEX?

Every stock that is listed on the stock exchanges has a market price, at which it is bought or sold. Buying or selling of shares is known as trading.
And every company whose stocks are listed, issue a particular number of shares for trading in the markets. This number is known as the number of outstanding shares.
Multiplying the number of outstanding shares with the market price gives a value, which is known as Market Capitalization.
Now those five thousand odd listed companies are ranked based on their Market Capitalization, starting from the highest to the lowest.
The top 30 companies from this ranking are what collectively comprise the Sensex.
Each of these 30 companies has a particular weightage, which contributes to the overall value of the Sensex.
Sensex is the amalgamation of the words Sensitivity and Index.

An important point here is that the top 30 companies may change their rankings. A company that is ranked much lower can also come up and replace a higher one to be in the top 30. This new company, along with the other twenty-nine companies, will now constitute the Sensex.

The change in ranking happens because of the fluctuations in the price of the company’s share price. A company having a profitable year for its business is good news. Investors love good news. The share price of the company increases when investors are happy.

Similarly, bad news such as an accounting fraud being reporting about a company upsets investors. Bad news makes the share price take a plunge. A recent and significant example of this is the case of Yes Bank in India. Once a pioneer in the banking set, Yes Bank’s share prices dropped more than 95% in a matter of months. A similar example could be that of Enron in the United States, which ultimately led to bankruptcy.

Similarly, there is another indicator in India know as the NIFTY. It consists of the weighted average of the top 50 companies based on a similar ranking as that of the Sensex.

So the two indexes in India are the:

BSE Sensex
NSE Nifty 50

Importance of the BSE Sensex

The Sensex is an indicator of the way businesses are running in the country. It is because the top 30 companies encompass different sectors of the economy, such as:

FMCG or Fast Moving Consumer Goods
Banking and Financial Services
Insurance
Power
Pharmaceutical
Manufacturing
IT

We often hear about the rise or fall of Sensex. Stock market analysts track the movement of Sensex and with it each of the 30 stocks in it. Thus, a significant increase or fall in the value of Sensex could reveal a vivid picture of the economy of the country.

The distinction between Large-cap, mid-cap, and small-cap companies listed on the exchange

As discussed previously in this article, every company has a market capitalization. Companies whose Market capitalization exceeds Rs. 20,000 crore are known as Large Cap companies. Companies such as Reliance Industries, ITC, State Bank of India are large-cap companies.

Companies with a Market capitalization exceeding Rs. 5,000 crore but less than Rs. 20,000 crore are known as Mid-cap companies. These include companies such as Larsen & Toubro Technology Services, PVR, etc.

Companies having a Market capitalization of less than Rs. 5,000 crore are known as Small-cap companies. Bombay Dyeing is an example of a small-cap company.

SEBI – The role of a Regulator to BSE (Bombay Stock Exchange), NSE

SEBI or the Securities and Exchange Board of India is the apex regulator of the stock market in India. The role of a Regulator is crucial in the stock markets. SEC or the Securities and Exchange Commission holds a similar position in the United States.

The Regulator governs the functioning of the stock exchanges, namely BSE and NSE, in the case of India, the mutual fund houses, stockbrokers, and any other registered financial advisors.

Companies that wish to get listed on a stock exchange has to submit a proposal to SEBI. If rejected, the company would need to provide other relevant documentation as instructed by SEBI.

Myth-busters and facts about the stock market and the Index:

Investing in the stock markets is the key to one’s financial independence.

Some people believe that investing in the stock markets is equivalent to gambling. However, this is nothing but a myth.
Another section of people is of the view that investing in the stocks would make one super-rich overnight. This belief or expectation is also wrong. Getting rich quick is a mirage to which a lot of people fall prey. That is when people lose their hard-earned money.

Investing in stock markets requires patience. And knowledge too. If these two simple guidelines are followed closely, investing can create wealth in the long term.

To substantiate the above point with a few examples:

If Rs. 1 lakh were invested in the BSE Index in 2005, its value would now be Rs. 4 lakhs.
If Rs. 1 lakh were invested in Eicher Motors, which is the parent company of Royal Enfield in 2011, its value would now be Rs. 17 lakhs.
If Rs. 1 lakh were invested in TCS in 2005, it would have now become Rs. 12 lakhs.
An investment of Rs. 1 lakh in Havells in 2009 would have now become Rs. 61 lakhs.

Essential steps towards investing in the stock market

Emotions drive stock markets around the world. One mustn’t operate by emotional decisions in the stock market. There is a whole section of study in Finance solely dedicated to this. This study is known as Behavioral Finance.
Patience is the key. Invest in companies that you believe in and then sit back and watch your investments grow over time.

Both the BSE and the NSE have been instrumental in making patient investors really wealthy. Rakesh Jhunjhunwala is one such Indian investor.

On the other hand, there have been greedy and impatient people who have lost more than a fortune. Harshad Mehta is a well-known example of that.

Lately, the BSE has done a tremendous job in creating awareness in India. The Bombay Stock Exchange regularly comes up with various advertisements in the print as well as digital media. These advertisements aim to put forward the message that one should first understand the risks and then invest. No one should invest in the stock markets based on some recommendations by self-proclaimed experts.

In this modern age, where information is easily accessible, it is of utmost importance that people become financially literate. Warren Buffet, a world-famous stock market expert, says that