B. If the above is true, then you should be able to do a "sociological" survey of stock prices independent of other news that effects stock prices. The general explanation for this behavior is that the masses tend to listen for the news they are ready to hear, and that the movement that actually happens depends on other effects.

Advantages of Buying an Index

Indexes are a nice way to gain exposure to certain markets or sectors without having to corner the market in stocks. It’s easier to buy a commodity index instead of buying barrels of oil, some cattle, and a few bags of wheat. You can gain exposure to the overall performance of a market buy buying the appropriate index basket.

Disadvantages of Buying an Index

While an index is designed to emulate a certain market, it doesn’t mean it’s 100% accurate. Just because you buy a foreign market index in a certain region doesn’t mean your basket will move exactly with the economy of that region. There are many factors that can alter the course of a market that sometimes an index can’t reflect, at least not immediately.

Filling a basket order is not always the easiest process either. While it is easier to buy an index than 4,000 industry stocks, that doesn’t mean you always get your target price. If you use market orders, you will eventually fill your basket, but you may not get the desired price. Or if you use limit orders, you may not get all the shares needed to fill the basket.

And not all indexes are liquid. Meaning it may be difficult to trade in and out of certain index positions. Then again, the same thing can be said for certain securities as well.

Over time, the market has averaged about a 15 % return annually.

How many times have you heard this statement or one like it to justify investing in the stock market? The statement is sometimes used to suggest that investing in the stock market will earn you a 15 % return if you leave your money in long enough.

The problem with statements like this is that they are half-truths, often used out of context with beginning investors who don’t understand the complete truths.

Problem One

The first problem is the statement suggests that you should expect a 15 % annual return from your investments in the stock market. Really? Which investments?

People unfamiliar with investing may assume that buying a few (or one) stocks will set them up for this famous 15 % return.

Problem Two

What Market?
The second problem is what do they mean by “the market?” It wasn’t the Sensex in 2008, because it didn’t return 15 %. You can buy mutual funds that track large portions of the market like the BSE 100 or S&P CNX 500, but they didn’t perform any better.

The fact is that by investing in individual stocks you are not buying “the market,” so what the market does is of little concern to you.

Your focus is on the portfolio you create and how it will perform in the future, because that’s all that matters. If you want to keep score by comparing your gains to those of some benchmark like the Sensex, Nifty or S&P CNX 500, feel free to do so.

However, keep in mind investing is not about beating a benchmark. It is about securing your financial future. If the S&P CNX 500 is up 2 % and your portfolio is up 3 %, that will be little comfort when you need real Rupees to spend in your retirement.

Being a long-term investor, you should focus on buying quality stocks that will meet your financial goals. Investments based on sound research in strong fundamental companies in the right sector tends to outperform the indices in a long run.

The risks in terms of liquidity and impact cost increases as we move down the capitalisation curve.

Note: Apart from market capitalisation, investors need to bear in mind their individual investment goals, risk tolerance levels, financial health and their understanding of the security. Hence, to take an exposure to a small-cap or a mid-cap stock, recommendation from equity research analysts is advisable.

Sensex & Nifty are more often interpreted collectively with different market records, as both indices are the roots of the Indian stock market. Representing the BSE and NSE respectively, Sensex & Nifty mirror the value of a company in the active stock market.

A group of 30 companies marks Sensex whereas Nifty exhibits the performance of 50 companies. If you read or listen to any Sensex news, Nifty news automatically follows, as the Indian market is incomplete without the figures displayed at these two stock exchange bases. Given the high volatility of the indian stock market represented by the Sensex & Nifty, the layman may find it difficult to understand the fluctuating nature. With expertise, this drawback can be negated.

BSE Sensex puts a close attention on Indian companies and corporate conglomerates like Reliance, Tata, Bharti Airtel, DLF Limited, HDFC, Grasim Industries etc. These companies are the active part of the cluster of thirty companies which run with this index. Index weightage is derived and calculated by using "free-float market capitalization" strategy that proved to be very effective in long run.

As an investor, you can stay informed about the rise and fall of stock prices by watching either Sensex news or the Sensex index. Making intelligent assessments and acting consequently to be successful in the stock market. The BSE has over 6000 companies in its listing, the greatest number in the world. With its 134 plus years of market presence and given its breakthrough role in the formation of the Indian capital market, Sensex has come a long way and the era of the Indian stock market is calculated from the day of the founding of the BSE. Any investment involves the risk factor and the BSE is no exception. Similar is the case of NSE. Stay updated with the latest performance of the Sensex & Nifty to experience a winning rim.

Market fluctuation is obvious in the Indian stock market, and if you are finely tuned to investment strategies, you will definitely gain. Many investment and stock broking platforms like Reuters India provide effective advices and quotes including the A-Z of the performance of Indian markets and world markets. Moreover, the stock recommendations displayed at such platforms, can bring a difference in your investment approach.

Sensex has multiplied 32 times since its debut 24 years ago.

Sensex: A Barometer of Indian Equity Market

A major milestone in the Indian stock market ws the launching of the BSE Sensitive Index on the January 2, 1986. Making a humble beginning of 549 points on the first day, this 30 stock index has acquired great significance and has truly become the barometer of the Indian stock market today.

Prior to Sensex there was on benchmark to help investors track the movement of the Indian stock market. Sensex has not only helped Indian investors gauge the growth of the market, but also helped global investors to taste the flavour of the Indian growth story. Such is Sensex's hold on the investor's mind that even after establishment of NSE in 1994, it is the sensex which has a better recall value than the NSE's Nifty.

Consisting of the 30 pivotals, the Sensex has 1979 as its base year. Each of these stocks has weightage directly proportional to its free float market capitalization, which effectively means that the companies with largest free float market capitalization get higher weightage than those with the comparatively lower capitalization. However, when Sensex was launched weightage was given based on full market cap. To be a part of the Sensex, there are certain quantitative and qualitative parameters such as market cap, liquidity, frequency in trading, industry representation, listing history and track record of the company etc. Only companies which stand the test of these parameters find a place in sensex.

What is more significant about the Sensex is that it was designed in such a way that the companies represented in the index are leaders in their respective sectors. Thus while some sectors have continued to reign and are represented in the index, the benchmark has also accommodated various emerging and high growth sectors such as IT, financial services and telecom. And who would forget the entry of the real estate sector with the entry of the real estate big dady DLF in the sensex after it displaced Dr. Reddy's from the list.

But Sensex has changed over the years with just eight companies still continuing to be part of the Sensex since inception. Interestingly, there were companies to be part of the Sensex original's list., but failed to make it to the list when the Sensex debuted in January 1986. These companies were Bombay Burmah, Asian Cables, Crompton Greaves and Scindia. Also there were two companies, namely L&T and Tata Power, which made temporary exits, but made their way back into the Sensex, while others in the pack gave way to new entrants.

The Sensex is much more dynamic today than it was previously as it represents a wider spectrum of the economy. Though the market has turned more volatile on account of global factors, we feel it is these high growth companies in the pack that would help the Sensex take a giant leap in the coming years.

After the Union Budget 2010-11, the big question in the mind of many investors probably is - Will the markets correct more looking at week global cues or positions for long term can be taken at these levels considering better than expected budget?

This article looks into the probable direction of the Indian markets in the next 2-3 months. It is impossible to predict any levels for the indices. Hence, that is not something we would attempt to do. We will primarily try to figure out the probable trend for the markets based on certain factors and events.

Not surprisingly, stock markets gave a rousing welcome to the Budget and rose immediately as the FM presented his speech.


Pranab Mukherjee also sought to raise excise duty for sectors like cement, capital goods and autos, in a mild way — the 2% hike was less than the 4% as per analyst expectation.

• The Budget was good and coming back to fiscal discipline is a good move.
• The Budget was also growth-oriented with financing incentives for real estate, infrastructure and agriculture.
• The Budget another key announcement was that the RBI would consider giving banking licences to non-banking financial companies (NBFCs).  

While the markets got something to cheer, after witnessing seeing consolidation in the past few weeks, weak global cues could remain the party-spoiler ahead. So even as specific sectors get a potential earnings boost, the overall global investment climate continues to remain tepid. The markets are still dependent on the global markets, commodity prices and global currencies.


Sectors to Prefer:

Infrastructure - Set to be in high growth trajectory with financing incentives from government.
Non Banking Financial Companies (NBFCs) - Entry in banking space will increase business scope and earning dimensions.

The reasons why we believe that indian stock market might correct further are discussed below.

Valuations still look expensive: 
The Indian markets are still trading at a PE of close to 21. This is higher then the average PE the Indian markets have traded in the last 10 years. Also, the Indian markets have gone up over 100% from its March 2009 lows. After such a steep rise, a correction of even 20-25% can't be ruled out. This would be healthy for the markets in terms of attractive more money as valuations again start looking fair.

China Credit Tightening:
The Central Bank in China has been making efforts to control the credit growth as there is a high probability of asset bubbles and run away inflation in China. Infact, one can say that the Chinese property market is already in a bubble stage. Therefore, there is a high probability of aggressive policy action to control credit growth and this can slow down China's growth significantly. Any such event will trigger a sharp sell off by the FII's in the emerging markets. Hence, the Indian economy might do well and the stock markets tank or correct significantly.

Plenty of problems in the Western World:
The developed world has averted a financial disaster but are surely not out of the woods. The fears of soverign debt default is a very valid one. The fear os the U.S economy slowing down again is also valid and highly probable. Therefore, there are not many positive cues which one can expect from the developed markets.
 
Inflation Concern:
There is no doubt that the Indian economy is coming back to a robust growth trajectory. At the same time, inflation is also becoming a greater concern. The food inflation has shown no signs of easing and the WPI inflation is also going up at a robust pace.

Sectors to Avoid:

Industrial Commodities - will be negatively impacted if there is a sharp slowdown in China.
Crude Oil Exploration - The China slowdown factor might impact exploration Companies as crude price corrects.

Index Gyan section covers Sensex & Nifty to provides basic information of index stocks, expert views in term of nifty and sensex support and resistance levels and technical analysis of chart patterns which may guide investors about entry and exit levels for investment in indian equity market.

Below are the posts published in Index Gyan section of www.saralgyan.in

• Indian Equity Market Outlook - Post Budget FY 2010-11
• Sensex @ 1,00,000 by 2020?

In view of the fact that the BSE Sensex has yielded an internal rate of return (IRR)of 17.25 percent since its inception in 1979, the chances of it hitting the 1,00,000 level over the next decade is quite possible. Below are some facts and figures which justify such possibility and give some insight on long term sensex targets.

1. Over a period of the past 30 years i.e. 1979-2009, bhe BSE Sensex has yielded in IRR of 17.25 percent per annum. If history can form any basis for the future and if the historic average IRR of 17.25 percent per annum has to be maintained, the sensex will reach whopping high levels of 1,00,000 or more by 2020.

2. If we look at the commencement of bull phase of the indian capital markets i.e. from 2003 onwards, the BSE Sensex has yielded an IRR of 26.21 percent per annum. If such an IRR of 26.21 percent has to be maintained, the sensex has to reach a level of 2,23,000 by 2020.


3. If we look at sensex targets by 2050 i.e. after 4 decades from now with an IRR assumption of 17.25 percent per annum, we will see sensex at 1,17,50,000 (1 Crore seventeen lakh fifty thousand)

4. If we have a bull phase for 4 decades, an IRR assumption of 26.21 percent per annum, sensex shall be at 24,05,77,897 (24 Crores plus)

We do not have any idea what is there in store for indian markets in the next decade or century. If anybody gets a feeling that the indicative sensex levels discussed here is hypothetical and out of reach, we wont complain because the indicative levels surely are sounding exaggerated. This is done assuming that all the 30 sensex companies are going to contribute to it in line with their respective weightage.

However, it leaves us wondering if equities can't even yield 17.25 percent per annum IRR in the next decade because that is the period which is widely accepted to be the "decade of India".