10 Mins

Introduction

Sensex and Nifty are market indices that represent the market. They are the benchmarks for the country’s stock market trend, development in the industry, and individual investors’ portfolios. This article covers in detail Sensex and Nifty, their calculation and the differences between the two.

What is Sensex?

Sensex is derived from Sensitive and Index and is coined by Mr Deepak Mohoni, a stock market analyst. It is an index on the Bombay Stock Exchange or BSE. Sensex comprises 30 companies, and these are chosen based on the liquidity, market capitalisation, revenue, and diversification of the company. Also, for a company to be on Sensex, has to be listed on BSE. 

It is one of India’s oldest indices, and people consider it a measure of market performance and reflection of the Indian economy. It is used as a benchmark to gauge growth and development in the Indian economy and industry and understand the stock market trend.

Sensex comprises the top 30 stocks. The value of the index depends on the price movement of the underlying securities. An increase in the value of Sensex is due to an increase in the price of most of the securities. While a decrease in the value of the index is due to the fall in the price of most of the underlying securities.

What is Nifty?

Similar to the Sensex, Nifty is also an index. The National Stock Exchange is represented by Nifty. Nifty is a variation of the terms National and Fifty. The Nifty 50 is also a benchmark index, consisting of the top 50 stocks listed on the National Stock Exchange.

The top 50 stocks that comprise the Nifty 50 are from 12 different sectors. Some of these include information technology, consumer goods, financial services, automobiles, telecommunications, etc.

The companies to meet the following parameters and criteria to be part of the Nifty 50:

  • Liquidity: The stock should have been traded at an average cost of 0.50% or less in the last six months.
  • Float Adjustment: The float-adjusted market capitalisation of the company must be at least twice that of the current smallest index composition.
  • Domicile: The company must be listed on the National Stock Exchange NSE and be an Indian company.

What is an index?

An index is a market benchmark that tracks the performance of a basket of securities. This basket of securities represents the entire market. An index is made up of securities that are chosen based on market capitalisation or other criteria. Any change in the price of the underlying securities affects the value of the index. Since the index represents the entire market, any change in the value of the index affects the value of companies that are not listed and other financial products, including commodities.

Indexes are also created to measure economic indicators like inflation and interest rates. They act as a benchmark to gauge portfolio returns. Investors can compare their investment portfolio returns against the benchmark returns and make changes to their portfolio if needed. The popular indexes in the country are Nifty 50 and BSE Sensex.

Major factors that affect the performance of indices

Often the stock market reflects the state of the country’s economy. During an economic slowdown, there is often some sluggishness in the market too. Following are some of the factors that affect the performance of the indices:

Interest Rate

With interest rate changes, the stock market index experiences ups and downs. For example, when the government increases the interest rates, the borrowing cost of the companies increases. And, as a result, the company tries to cut their expenses. Therefore, this may have a negative impact on the company’s earnings and on the share prices.

Inflation Rate

Inflation also has an impact on the stock market indices. For example, when inflation is high, individuals do not have the surplus amount that they can use for investments. Hence reducing the investment power. Also, companies suffer from it too. The higher input costs of the company are passed on to the customers. These directly impact sales and have an impact on the company’s earnings. As a result, there is an affect on the share prices as well.

Global Economy

The equity markets are affected by a global economic slowdown. Furthermore, the other factors that impact the stock market performance are currency exchange rates (rupee movements), crude oil prices, political instability, etc.

Types of Stock Market Indices

A stock market index doesn’t just represent the entire market on the whole. In fact, there are specific sector-based indices that represent a particular sector. There are also market capitalisation based indices that represent companies that fall under a particular market cap. Following are the different types of market indices:

Benchmark index

A benchmark index represents the entire stock market at large. It helps in analysing and understanding market trends. It is used as a benchmark to measure the performance of individual investment portfolios. The benchmark indices in India are BSE Sensex and Nifty 50.

Broad market index

A broad market index is also a benchmark index; however, it comprises more number of stocks. For example, BSE Sensex comprises 30 financially sound companies. But BSE 100 comprises the top 100 companies and hence is a broad market index.

Market capitalisation index

A market capitalisation index focuses on a particular market cap representing all companies that fall under that market capitalisation—for example, BSE Small cap and Nifty Midcap.

Industry or sector-based index

Sector-based indices represent an entire industry at large. They will have companies that fall under one industry—for example, Nifty Pharma, Nifty FMCG, and Nifty Auto etc.

Significance of a Stock Market Index

Nifty and Sensex are share market indexes that show how the stock market is doing. Individuals can study and analyse the patterns of the stock market using these indices.

Helps in stock picking

Thousands of companies are on the exchange. It is difficult for an investor to review all of the stocks before narrowing down their investment options. Therefore, without a benchmark index, it is often difficult to differentiate two stocks. In such scenarios, the stock market indices come handy. Furthermore, an index segregates the stocks based on their industry, size, financial impact, etc. As a result, investors can compare the stocks that make up an index and narrow their search for analysing the companies.

Helpful for beginners

Stock markets are very volatile, and hence investors must be careful and always proceed with caution. As beginners are not aware of the market dynamics, the market indices are a good reference point to understand and analyse the stock markets performance. Beginners who are investing by themselves and are not hiring a financial advisor can track and invest through an index.

Reflects investor sentiments

Individuals can analyse investor sentiments through the stock market index movements. For example, certain reform or business announcements create a sense of pressure on certain stocks. In other words, some investors perceive such news may have an impact on a company and on that basis, they buy or sell the stock. However, it is important to analyse the underlying sentiment to estimate the impact of any trend.

Passive investment option

Investing in an index is a shortcut to investing in the best stocks. This is passive investing. The investor doesn’t have to do much research or analyse the stocks before investing individually in all of them. With just a single click, they can invest in an index fund replicating the benchmark index.

How to calculate Nifty?

Nifty 50 uses the free-float market capitalisation weighted method.  The price of the index reflects the total market value of all the stocks in the index relative to the base period on November 3rd, 1995.

Market Capitalisation = Current market price * Outstanding shares

Free Float Market Capitalisation = Shares outstanding * Price * Investable Weight Factors (IWF)^

Index Value = (Current Market Value / Base Market Capital) * Nifty Base Index Value (1000)

The aggregate market capitalisation of each scrip in the index during the base period is the index’s base market capitalisation. During the base period, the market capitalisation is equated to an Index value of 1000, which is known as the base Index value.

^Investible weight factors are the units of floating stock expressed in terms of a number that are available for trading and which is not held by the entities having strategic interest in a company. The IWF’s for each company in the index is calculated using the public shareholding of the companies as reported in the quarterly shareholding pattern filed with the stock exchanges.

How to calculate Sensex?

Sensex is calculated based on the free-float market capitalisation of the underlying 30 companies and the base value of the Sensex. Following are the steps to calculate the value of Sensex:

  • First, the market capitalisation of all 30 companies is calculated.
  • Then, the free-float market capitalisation of the companies is estimated and added together to get total free-float market capitalisation.
  • Sensex formula = (Free float market capitalisation of 30 companies / Base market capitalisation) * Base value of the index.
  • The free-float market capitalisation is already estimated above. The base market capitalisation is INR 2501.24 cr. It is the value of the market capitalisation of Sensex in the year 1978-79. And the bae value of 100.
  • All these values have to be put in the Sensex formula to determine the value of Sensex.

Difference between Sensex and Nifty : Sensex vs Nifty All about Indices

Following are the key differences between Nifty and Sensex:

ParameterNiftySensex
Full-FormNational and FiftySensitive and Index
OwnershipOwned and managed by an NSE subsidiary, Index and Services and Products Limited (IISL).Owned by Bombay Stock Exchange (BSE).
Base NumberNifty’s base is 1000Sensex’s base is 100
Base PeriodNovember 3rd 19951978-79
Base CapitalINR 2.06 TrillionNA
Number of StocksTop 50 companies that actively trade on NSE.Top 30 companies that actively trade on BSE.
Number of sectorsCovers 24 sectorsCovers 13 sectors
Foreign ExchangesNifty 50 trades on the Singapore Stock Exchange (SGX) and Chicago Mercantile Exchange (SME)It trades on EUREX and stock exchanges of BRCS nations

Which is better, NSE or BSE?

NSE and BSE are stock exchanges in India. The Bombay Stock Exchange (BSE) is India’s oldest stock exchange. In comparison, the National Stock Exchange (NSE) is the biggest stock exchange in India. NSE has high trade volumes in comparison to BSE. In other words, in NSE, there are more active buyers and sellers. Also, NSE has higher liquidity. It makes trading easy and offers more opportunities for investors to convert stocks to money.

On the other hand, BSE is a gigantic pool of stocks. There are numerous companies that are part of BSE. Also, all stocks that are part of NSE are a part of BSE as well. Furthermore, in the derivatives segment, NSE is a monopoly with Nifty. NSE Nifty and Bank Nifty are the ones that are highly traded.

Therefore, BSE is more suitable for beginners, while traders and seasoned investors mostly prefer NSE. Also, for an investor looking to invest in new companies, then the ideal choice is BSE. However, for traders who deal in futures and options, derivatives NSE is the ideal choice. 

Frequently Asked Questions

Is Sensex better than Nifty?

Sensex and Nifty are broad market indices and benchmarks of the equity market. They represent the entire stock market, and hence any change in these two indices affects the entire market. The only difference between the two is that Sensex comprises 30 stocks while Nifty has 50. Sensex is more niche, and in a bullish market, top companies push its index value higher. In contrast, Nifty is broader as it has 50 companies in the index. Hence in a bullish market, the increase in the value of Nifty is lesser than Sensex. Therefore Nifty value is lesser than Sensex. Sensex and Nifty are independent indices that represent the stock market. Hence, one is not superior to the other.

How does Nifty and Sensex work?

Nifty comprises of top 50 companies that actively trade on the National Stock Exchange. Nifty uses the free-float market capitalization weighted method. Sensex is also based on free-float market capitalization. However, it comprises of the top 30 companies that actively trade on the Bombay Stock Exchange.