Maha Bharat: Episode 2

What is the Sensex?

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Up and down and then up again — following the Sensex’s cyclical climb and fall can be confusing. But there is a reason why so many Indians break their heads over the BSE’s stock market index.

Apart from giving you an indication of which way the Bombay Stock Exchange is headed, Sensex also gives you an insight into how the top companies in the highest echelons of corporate India are performing. In the short run, the Sensex’s movement surely makes for good prime time television drama but in the long run, it can be a leading indicator of the economy. This episode breaks it all down for you.

Show Notes

All clips and voices used in this podcast are owned by the original creators

We thank wholeheartedly our guest who appeared on this episode:

  • Anupam Gupta

Links to clips used in this episode —

Full Transcript of Episode 2

[The sounds of news channels announcing fluctuation in the Sensex]

Kabhi upar, kabhi neeche, jab bhi sensex ki baat hoti hai, toh dher saare draame ke saath hoti hai.

But what is this sensex?  

What does it mean when they say the sensex has gone up or down? And, how does the sensex affect our life?

For us to understand what the sensex is, we’ll have to first understand what a stock market is.

So where do we start. 

Let’s say there’s a furniture company called ABC. ABC was established 5 years ago in…let’s say Bombay. 

Okay, for 5 years now, the company has been doing good business and has earned a good reputation in the ir field.

On ABC’s fifth anniversary, the owners decide that they now want to expand and open showrooms, workshops and factories in two new cities. 

They need money for this. While they have some money from all the profits they have made in all these years, they need more money to make the expansion happen. 

And.. they don’t want to take a bank loan either. So they decide to ask people, the public, the aam junta, fans of ABC, to invest in their company. 

Basically, you can think of it as crowdfunding.

They first convert ABC from a private limited company into a public limited company. What this means is that they invite people to become co-owners ya part owners of the company. Yaani, ABC mein invest karne ke liye aamantrit karte hain.

The owners of ABC assess the value of their company, divide that value into smaller units or what we call shares and offer them for sale to the public. 

So, if you assume that ABC’s value is Rs. 1000, they divide that into smaller units, for example 100 shares of Rs. 10 each and offer each share for sale.

People who like ABC’s brand, its work, decide they want to invest and buy these shares. They become ABC’s shareholders and part owners of the company.

This way ABC gets its money for expansion.

And what do investors get?

As the value of the company grows, the value of each share increases and each shareholder now owns the same number of shares as before but each share is a little more valuable.

Chalo, ABC is happy and their shareholders are now keeping track of their business — are they making profits, what’s their competition like etc etc.

[We hear a new clip about Flipkart]

Now imagine you are one such shareholder and have also invested in ABC.

A few months later, you see that XYZ, another big company is also offering shares for sale. And you see that XYZ has a better track record in terms of profits. So you think it might be a good idea to buy their shares. On top of that, you see that ABC is not doing so well.

[We hear a news clip about Tiger investing in Amazon]

What do you do? Sell your shares in ABC and buy the shares of XYZ instead. Simple.

The question is where will you sell it? You need to find a buyer for your ABC shares, na?

THAT’s when you enter the stock exchange.

[We hear sounds from inside the Bombay Stock Exchange and the New York Stock exchange]

The stock exchange is a market place where shares of public limited companies are bought and sold. It’s a place where there are many shareholders/investors like you who want to buy shares that other investors are selling. Or sell shares that they don’t want to keep any more to other investors who might be interested in buying. 

Companies that are offering shares are listed on the stock exchange so you can see what the value/worth of different companies is like and buy or sell accordingly. 

Some investors buy and sell shares on a daily basis, while some others invest in companies for years. Both kinds keep a track of how companies are performing, what their reputation is in the market etc etc. 

Most modern economies have at least one stock exchange. 

The largest stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These two stock exchanges have the largest number of companies and investors trading on them. NSE has around 1600 companies whereas BSE has around 5000 companies.

Now, a stock exchange is a big place. As an investor, you cannot possibly keep track of the performance of 5000 companies!

So, what do you do?

You look at something called a stock market index. A stock market index basically represents the stock market — if the stock market is a film, index is like a trailer. It gives you an idea about the larger picture.

A stock market index selects a group of important companies and tells you how they are performing — i.e. is their value going up or down. 

So, as an investor, all you need to do is look at this index and you can get a sense of how the market is in general.

The SENSEX is one such stock market index.

Yes, NOW we have finally come to the topic of the day

So like I said, Sensex is a stock market index — and it is an index for companies listed on the Bombay stock exchange.

Sensex gives you an indication of how the top 30 companies listed on the Bombay Stock Exchange. I.e. 30 out of 5000, are performing. These are big companies like Reliance Industries, Bharti Airtel, L&T, Tata Steel, Axis Bank etc etc. And they are considered the top companies in the Indian economy.

The idea is that as an investor, if you look at the top companies of the country and their performance, you can get an idea of what is happening in the Bombay stock exchange in general. Because big companies obviously have influence in the market.

And like the Sensex, there is also a similar index called the Nifty which represents the top 50 companies in the National Stock Exchange.

Acha, by the way, Sensex is actually a nickname and not the real name of this index.

The index’s real name is Bombay Stock Exchange Sensitive index and it is the oldest stock index in India and was created in 1986.

How did Bombay Stock Exchange Sensitive Index become Sensex?

All thanks to one man.

[We hear the voice of Deepak Mohini giving advice on the Stock Market.]

Deepak Mohoni. A chemical engineering graduate from IIT Kanpur with an MBA from IIM Ahmedabad, Deepak Mohoni is a well-known stock market analyst. He appears on business news shows advising investors on what shares to buy and what to sell etc. He also writes columns and articles about the financial market for different newspapers. 

Aise hi, when he was writing an article for Business World magazine many years ago, he felt that Bombay Stock Exchange Sensitive index is a looong name for an index. 

Ek interview mein, with a journalist from Money Control.com, he says, that “other stock exchanges across the world had a smaller name to represent their index, so I decided to coin one too.”

He asked the editor of Business World if he can use the word Sensex instead i.e. Sensitive and Index ka mishran and the editor whose name was R Jagannathan, immediately agreed. Jagannathan also asked other journalists to use the same word in their articles and slowly, the word Sensex became quite popular.

Moving on, what does it actually mean when news anchors tell us that Sensex has climbed up by 1000 points. 

I was chatting with jaane-maane finance expert Anupam Gupta to understand sensex better and we were talking about exactly this: What do we understand when we hear that Sensex has gone up by 1000 points?

Anupam Gupta
So what does it really mean…It just means that the value of those 30 companies is higher by 1000 points today. It just means that…abhi aap aisa samajhiye ke abhi aap aloo kandha tamatar ke bhaav jaise upar neeche jaate hai, same with stock prices. Aaj aise hain, kal waise hain. So 1000 points up just means ki yesterday ke comparison mein, aaj the value of those 30 companies in the sensex has gone up. Aur uska mathematical value is 1000 points.

Right, so it could mean that all the 30 companies are doing well, i.e. their value has increased. I.e. more people are investing in these companies. 

Or, it could also mean that a few companies in this group of 30 are doing really well and not all. Jaise Anupam explain karte hai yahan.

Anupam Gupta
Not necessary ki sab 30 companies ki value upar gaye. Aisa samajh leejiye ke aap vegetable market jaa rahe hain aur aap kandha, tamatar, bhindi, baingan, adrak, sab le liye ek basket mein today. Kal, woh sab ke prices upar gaye. Aisa ho sakta hai ke aloo kandha ke gaye, lekin tamatar ke nahi gaye. Lekin total value jo aata hai, woh kal ke comparison mein higher hai. Sensex  runs the same way. It means that out of the 30 companies, some companies value has gone up and that value is a lot.

Anupam ji ke example ko stock market mein agar hum apply karein toh. For example, Reliance industries ko le lo. It could have more value and weightage within the sensex than say maybe an Axis Bank. This is only a hypothetical example by the way. So both companies are part of the Sensex. But, sometimes what could happen is when two or three of these really big companies, with bigger weightage in the Sensex, perform well, then also Sensex can move up simply because of how big or influential these companies are.

You might remember that I said ki, if the stock market is a film, index is like a trailer. It gives you an idea about the larger picture. Toh Sensex is basically supposed to give you a general — picture of what is happening in the stock market.

That is, whenever the sensex goes up, it more or less means ki the value of other companies in the stockmarket also goes up, and when the sensex falls, it is the same trend for the other companies too. Abhi, is me bhi, it’s not always that this happens. — I’m not trying to confuse you. I’m just trying to say ki, sometimes it also happens that while sensex is going up, some of the share prices of small companies are not going up. Toh yeh bhi hota hai. But broadly, Sensex should represent ki stock market mein kya ho raha hai.

Now you can ask ki, 30 companies hi to hai! Why do we make such a big deal about 30 companies in the bombay stock exchange moving up and down? After all, these are just 30 out of the 5000.

So, I can see that for investors obviously, the performance of the Sensex matters, because they want to know if the money they have invested is doing well or not. Remember, there are investors who buy and sell in the stock exchange every day. So, for them, Sensex’s movement is crucial because a lot of money is at stake.

But, what if you are not an investor — then is the sensex completely useless to you? 

Not necessarily because the performance of some of the biggest companies in the market — their prices rising or falling — gives an indication of what is happening in the highest echelons of corporate India. 

Ek teesra reason bhi hai and that Anupam told me about:

Anupam Gupta
See Prices are live. They change every minute. Abhi it makes for such good viewing on TV also na. Imagine the drama, agar aap ka value of investment is suddenly up 20 per cent one week and suddenly down by 20 percent in a day, you know anything can happen. I think the daily up and down creates a lot of attention. 

As such why do we make a big deal? It’s live, makes for great viewing on television.

Basically the drama is always good to watch, especially if you’re not directly affected by it.

One of the most unique things about the stock market is the thing that drives investors to buy or sell shares. Basically Sensex moves up and down when investors buy or sell shares, right. But how do these investors make these decisions of buying and selling?

Short answer: Sentiment.

The stock market basically operates on sentiment (stock market sentiment pe chalta hai) i.e. Buyers and sellers in the stock market decide to buy or sell their shares based on their opinion or feeling about whether or not a company’s value will go up or not. (unko kya lagta hai..X company kaise perform karega)

These market sentiments are feelings of buyers and sellers on whether price of shares will go up or down in the future. 

How do they get these sentiments? I discussed this with Anupam again 

Anupam Gupta
Well see, sentiments are totally and completely driven by our emotions. One thing is sentiment can be something different today, something different tomorrow. But in general sentiments is also driven by expectations of the future because jo aaj ka stock price today hai will depend on what is going to happen in the future. If you think the future is great, then you’ll buy a stock and the stock price will go up. Sentiments change everyday.

Badi interesting cheez hai yeh sentiment and how it is applied in the stock market. Future ko dhyaan mein rakhte hue, investors yeh decision le te hain ki shares khareedein ya beche.

But investors yeh futuristic sa decision ko lete kaise hain? Matlab, what drives the sentiment?

Anupam Gupta
One thing is news. Obviously. Aaj ek nayi khabar aayi, uska impact stock price pe kuch aur hoga. It could be positive news, could be negative news. So news is something of course, whether it is of the economy or of certain companies is a big driver.

News! Toh basically, investors read the news and feel that it could affect the performance of a company. Like Anupam says, this could be news about the company, its annual or quarterly results, signing of a new deal, merger, etc. It could also be industry-specific news or a larger economic decision taken by the government. Nowadays, Indian stock markets are also affected by stuff that happens in the national and global economy. 

And it is often difficult to predict how the stock market will react. Jaise Anupam says:

Anupam Gupta
Sentiment thoda fickle bhi hota hai, it could be good today and bad tomorrow.

For example, late last year, when India’s economy was going through a slowdown — despite the high unemployment and slow production across businesses, sensex and nifty were rising. Woh kaise?

Stock market ke analysts ke mutabik, investors felt that the slowdown was a phase, that things will change for the better soon, and companies and the economy will be in recovery mode soon. Some analysts also say that investors also consciously or deliberately gave out the impression that things will be fine to ensure that there are no major losses in the stock market.

Now, let me also tell you about the opposite situation where sentiment is not so fickle.

[We hear a news clip about Sensex points falling.]

When the novel Coronavirus started spreading in the world, stock market indexes across the globe fell. And this is not just because of sentiment of investors alone but because many businesses have actually stopped functioning at the level they were previously. So automatically, their worth has dropped and obviously investors are selling their shares.

The larger question then is what do we make of this chanchal sensex. Some people say that the Sensex is a good barometer of the Indian economy. Can we say that is true when it is driven by something that fickle?

Anupam Gupta
When you look at the longer term, then Sensex is a leading indicator of the economy. Which means that if things are going to go wrong in the future, then the stock market could be giving you an indicator today or in a week or in a month and just look at it over the last 20 years, 2000-2001 mein jab tech bubble burst hua tha, to woh time pe sensex crash hua tha ,markets neeche gaye and uske baad ek global recession bhi aaya tha. So pehle market gire, phir recession aaya. Similarly 2008-9 mein jab global financial crisis aaya toh woh time pe bhi,sensex aur global markets gire, aur phir recession aaya.  

Toh conclusion yeh hai ki: When we speak of the day-to-day, Sensex moving up and down might not matter so much if you’re not an investor. BUT if we are talking about the long term, the big picture, then the Sensex does actually have a connection with the economy. 

How complex, how interesting! 

Anyway, this is essentially the story of the sensex. Next time, you hear about a big leap or fall in the sensex in the news, take a guess as to what might be the reason behind it.

Let’s meet next week with a brand new story, on Maha Bharat.

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Credits

Narrated by – Dhruv Rathee
Producer – Gaurav Vaz
Research help –
Written by –

Editing –

Title Track Design – Abhijith Nath
Audio Prouduction –
Recorded at –