Sensex? What's That?

The Sensex, which has crossed the 14,000 mark, seems unstoppable.
Which makes it the right time to give you some dope on the hot new craze in town.
What's so hot about the Sensex?
It is the benchmark index for the Indian stock market. It is the most frequently used indictor while reporting on the state of the market.
The index has just one job: To capture the price movement. So a stock index will reflect the price movements of shares while a bond index captures the manner in which bond prices go up or down.
If the Sensex rises, it indicates the market is doing well. Since stocks are supposed to reflect what companies expect to earn in the future, a rising index indicates investors expect better earnings from companies.
It is, therefore, also a measure of the state of the Indian economy. If Indian companies are expected to do well, obviously the economy should do well too.
In case you are wondering why a stock market index has a provocative term like Sensex, let me tell you it stands for something quite mundane -- The Bombay Stock Exchange Sensitive Index.

What is the Sensex made of?
Thirty stocks. That's right. Just 30 stocks tell you how the market is faring.
Before you throw up your hands in protest, there is something you should know about these 30 stocks.
For one, they are the most actively traded stocks in the market. In fact, they account for half the BSE's market capitalisation.
Besides, they represent 13 sectors of the economy and are leaders in their respective industries. Now that sounds fair, doesn't it?
Who selects these 30 stocks?
They are selected by the Index Committee.
This committee consists of all sorts of individuals including academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.
How do they select these 30 stocks?
Well, they definitely don't do it on the basis of their individual whims and fancies. Some of the criteria they follow include:
~ The stock should have been traded on each and every trading day (the days on which the stock market works) for the past one year.
~ It should be among the top 150 companies listed by average number of trades (buying or selling of shares) and the average value of the trades (in actual rupee terms) per day over the past one year.
~ The stock must have been listed on the BSE for at least one year.
Does the Sensex have any contemporaries?
In terms of age? No.
The Sensex is the oldest index in the country. It was born in 1986.
In terms of popularity, the Nifty follows close.
The Nifty? What's that?
Well, the National Stock Exchange has an index called the Nifty (officially called S&P CNX Nifty). This name can be credited to the 50 stocks that comprise its index.
Isn't that a broader representation than the Sensex?
You're right. The Nifty has 50 stocks covering 24 sectors, as against 30 stocks and 13 sectors for the Sensex.
In case you are shaking your head about 50 also being too small a number, let me remind you these 50 stocks account for around 60 percent of the market capitalisation.
If these indices tell us about the market, why do people talk about sectoral indices?
The price of every stock price increases or decreases for two possible reasons:
~ News about the company, like a product launch, closure of a factory, the government providing tax or duty exemptions to the sector so more profits expected, a feud among the company's top bosses, etc. This will be stock specific news.
~ News about the country, like testing a nuclear bomb, a terrorist attack, a budget announcement, etc. This will be called index news.
The job of an index is mainly to capture the news about the country. This will reflect the movement of the stock market as a whole.
A good index will only capture news that is common to all stocks in India. This is what the Sensex and the Nifty do.
What about stock specific news then?
This is where the sector-specific indices come into the picture. They reflect the performance of the stocks in a particular sector only
For example, the BSE's IT Index captures the price movements of information technology stocks while its Bankex represents the change in the prices of bank stocks.
So a look at the specific sector index will tell you about that particular sector. For instance, bank stocks may not be performing and that will be reflected in the Bankex falling or remaining stagnant even though the Sensex might have gone up.Did you know the NSE has a mid-cap index that is made up of mid-sized companies?
This index has run up smartly in recent months, rising even more than the Nifty, which shows that people have been investing more in smaller companies. This could be because the price for the stocks of bigger companies has increased recently.

Now, let's see how globally savvy you are.

Guess the countries these indices represent -- Dow Jones Industrial Average, the FTSE (Footsie) and the Nikkei?
The US, the UK and Japan.

What is an IPO?

An Initial Public offering is the first sale of a corporation’s common shares to public investors. The main purpose of an IPO is to raise capital for the corporation.
IPOs generally involve one or more investment banks as “underwriters”. The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

IPO Basics

Selling Stock

An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO.
Companies fall into two broad categories: private and public. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held? It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the Securities and Exchange Commission (SEC). In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock. Why Go Public? Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:
Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent. Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed.

Who is the UnderWriter?

The Underwriting Process

Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting.
When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required - it's just the way Wall Street works. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley. More Details..