The Sensex and the Nifty are indices of two of India’s most prestigious and popular stock exchanges. Sensex tracks the movement of thirty of the most popular stocks traded at the Bombay Stock Exchange (BSE), while Nifty measures and reflects the changes in value of shares of 50 leading companies traded at the National Stock Exchange (NSE). It is believed that rise and fall of the index mirrors investor’s perception of the companies which constitute the index at any given time and as such could serve as a guide or useful tool in arriving at investment decisions.
The extent to which the investors can rely on these market indicators for taking investment decisions depend on the nature of the investment. Since the index includes industries across the board and brackets the high performers with the non-performers in a most callous manner, these indices cannot and should not be used as final or as the sole determinates of any investment move.
A positive or upbeat market sentiment can lift the laggards and project them as potentially desirable stocks to possess, thus sending wrong or false signals about less profitable entities and as such likely to trick the investors into wrong movement. The correct approach would be to corroborate the indications provided by the Sensex or the Nifty by referring them to other parameters like company or industry specific P/E, dividend payout, indebtedness, profitability and other fundamentals.
It is difficult to separate the impact of forces of demand and supply from other factors influencing the indices. Many a times the Sensex may open with 400 points down but closes 300 point up, but it does not mean that fortune of the companies change in seven hours. The point that needs to be noted here is that it is not the demand and supply of the goods or services produced by an industry which under ordinary conditions should have formed the basis of valuation of its equity, it is the demand and supply of its shares which is largely based on perceptions that determines the direction of the index, i.e. whether it is going to end up higher than its previous close or that it is heading south. Now these perceptions are very often based on feelings or reactions to some kind of tenuous connection with events - political or economic occurring or likely to occur in any part of the globe.
This is indeed too much and investors should appropriately discount the usefulness of this tool in formulating their investment strategies. The question that is always present on every investors mind is that is this the right time to enter the market, or is it advisable to quit, cutting losses. The only thing that you must bear in mind at this stage is that wholesale reliance on the stock indices is not the wisest and hence the most practical thing to do. Look for the fundamentals, they constitute the reality of a company and in the long run, would be the ultimate arbiter of its fortune and along with that of its stakeholders.