The Sensex may have shifted significantly from its strong morning start by the afternoon. In a few hours, it could improve once again. For someone who is not knowledgeable with investment, these sudden changes could seem random. They’re not.
When thirty companies in the index change, the index changes too, but that’s only part of the story. International markets, buying and selling, economic news, and the mood of investors may all have an effect on it.
That being said, what is really going on when the Sensex changes during the day?
It often starts with the biggest companies
The Sensex does not give every company the same influence. Its calculation is based on free float market capitalisation. In simple terms, companies with a larger value of shares available for public trading have a greater impact on the index.
This is worth remembering when looking at a sharp rise or fall. The index may move quite a bit even if many other listed shares are relatively quiet.
For example, if a major company sees heavy buying after a strong business update, its rise can provide noticeable support to the Sensex.
News can change things within minutes
Markets rarely wait for the end of the day to react to important news.
A company may announce better than expected earnings. The Reserve Bank of India may make a key policy announcement. Crude oil prices may suddenly rise. A major overseas market may fall sharply. Each of these events can change how investors feel about Indian equities.
Sometimes the reaction is immediate. At other times, investors take a while to understand the news before acting on it.
Buyers and sellers set the pace
There is also a much simpler force at work. People are buying and selling shares throughout the session.
When buyers are willing to pay higher prices, stocks can move upwards. When more investors want to sell, prices can come under pressure. As prices of the Sensex constituents change, the index changes with them.
This is one reason the stock market can move even when there is no major announcement. Investors are constantly changing their positions based on expectations, news and their view of future returns.
Global markets can have a say
Indian markets do not operate in isolation. Traders also keep an eye on major international markets, currency movements, crude oil and changes in global interest rate expectations.
If overseas markets have had a difficult session, investors in India may become more cautious. A positive global trend might have the opposite effect. It may have an impact on the atmosphere when trading begins, but it does not guaranty that the Sensex will follow the same path.
What should you check during the day?
Sensex today alone might not tell you why the index has changed. It is useful to look at which Sensex companies are gaining or falling, whether a particular sector is leading the move and whether there is any major news behind it.
The Sensex is calculated continuously during market hours as the prices of its constituent companies change.
If you understand this, daily movements start to make more sense. Instead of wondering why the index suddenly gained or lost points, investors may dig below the figure to see what is really driving the move.
