Nifty And Sensex

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When you talk about the share market, there is a possibility that you might have heard of the terms Nifty and Sensex a lot. But do you know what these terms stand for and their meaning in the stock market world?

If you are not aware, then don’t worry. In this article, we will be talking all about these two terms – NIFTY and SENSEX.

Let’s dive in!

Firstly, when you look at the stock market’s direction, you will see the market index. In India, Nifty and Sensex are two essential and most commonly discussed market indices. Wait! What is a market index?

The statistical data that tells you the change in the price movement or the market performance is called an index. Investors use the market index to determine the market performance over a while. 

Both Nifty and Sensex are market indexes and are known as economic barometers! 

Now, we will know the meaning of both Nifty and Sensex. What do they mean? 

Nifty is the indices of National Stock Exchange and shares of the top 50 companies listed on NSE (National Stock Exchange). It represents the market index of around 62% of the capitalization.

Sensex is the oldest market index and contains the top 30 companies’ shares on the Bombay Stock Exchange (BSE), representing the market index of roughly 45% of the capital.

Let’s try to learn about Nifty and Sensex in-depth!

What is Nifty and Sensex?

Nifty – National Stock Exchange fifty was presented by NSE in 1996, and also known by the names such as Nifty 50 and CNX Nifty. Nifty shows the top 50 stocks’ performances from the 1600 companies traded over 24 sectors.

Nifty 50 is used for comparing index funds, index-based derivatives, and fund portfolios. It is managed by a subsidiary of NSE, Index Services and Products Limited (IISL).

Now, talking about Sensex is the market index of the Bombay Stock Exchange (BSE). Sensex is also known as the name of S&P BSE Sensex.

Moreover, Sensex is the oldest index presented by the Bombay Stock Exchange in 1986, including the top 30 companies in BSE.

In the upcoming section, you will learn about the difference between Nifty and Sensex!


Difference Between Nifty and Sensex

Apart from Nifty and Sensex’s similarities that both are broad market indexes that depict the stock market’s strength, few points tell us the difference between Nifty and Sensex.

So, let’s discuss those differences one by one!

  1. The Nifty is derived from the combination of National and Fifty consists of 50 actively traded stocks and has an Rs.2 trillion base, while Sensex is sensitive and indexed.
  2. Nifty is known as Nifty 50 and S&P CNX Fifty, and Sensex is known as S&P BSE Sensex.
  3. Sensex is owned by the Bombay Stock Exchange (BSE), whereas the Nifty is owned and handled by both NSE Subsidiary and Index and Services Products Limited(IISL).
  4. The nifty base number is 1000, whereas the Sensex base number is 100. The base period of Nifty is three November 1995, and Sensex is 1978-1979.
  5. Nifty comprises 50 top companies active in trading with NSE, whereas Sensex consists of the top 30 companies actively trading with BSE.
  6. Sensex covers 13 sectors, and Nifty has a large market index that covers 24 sectors out of 1600.

You can also learn from the table given below regarding the difference between Nifty and Sensex:

 

Further, in the next section, throwing some light over how to calculate nifty and sensex. Let’s get started.


How to Calculate Nifty?

The Nifty calculation occurs according to the free-float market capitalization-weighted methodology. It presents the total market value or price of the 50 Nifty constituents from the day it was founded, i.e., 3 November 1995.

The companies that will be calculated must be in the Nifty top 50 companies trading actively with NSE. Moreover, Nifty 50 constitutes a 0.5% or less average impact cost for over six months for a portfolio of Rs.10 crore.

To calculate the Nifty index, obtain the market capitalization by multiplying the number of shares by their price. In simple words, use the formula:

Market Capitalization = Shares * Prices

To calculate the free-float market capitalization, multiply the Investable Weight Factor (IWF) with the market capitalization.

Free Float Market Capitalization= Market Capitalization * IWF

IWF stands for the percentage of the shares that investors can freely trade in the stock market. Simply put, this is the percentage of the shares not maintained by any company or director.

Suppose you need to calculate the index value by dividing the current market value by base market value and multiplying by the base index value, 1000. 

Below is the formula for the same:

Index Value = Current Market Value / Base Market Capital*1000

(the base market capital of Nifty is Rs.2.06 trillion)

The index value indicates the profit an investor can earn if they invest in a specific portfolio.


How to Calculate Sensex?

Sensex also follows the same method as Nifty. Like Nifty, it also presents the total market value or price of the 30 top constituents from the day it was founded, i.e.,1978-1979.

Each constituent must weigh 0.5% of the stated index. Moreover, a stock should have a trading history of at least 1 year and must have traded on every trading day, then only it will be considered a constituent.

To calculate Sensex, first, calculate each company’s market capitalization using the same formula mentioned above. Then, to calculate the free floatation capitalization, you need to multiply the derived market capitalization with a free float factor.

Free Float Market Capitalization = Market Capitalization * Free Float Factor

The free-float market capitalization of the 30 companies divided by the index divisor of 100.

Index Value = Free Float Market Capitalisation / Index Divisor

The index divisor is the relationship between the base period and the current period. Just like Nifty, Sensex also reflects the returns you can earn by investing in the portfolio.

In the last segment, we will talk about the factors affecting the performance of an Index:


Factors Affecting Indexes

Sensex and Nifty are very touchy to the Economy. When the economy is flourishing, it gets reflected in the share market’s performance, and the indexes will be upward. Few factors that affect the performance of these indexes are:

  • Change In The Rate Of Interest: interest rate and share market move opposite always! When the interest rate increases, the loan becomes expensive. Therefore, the companies reduce their expenses, putting pressure on the stock market, which results in a decrease in indexes.
  • Inflation: rising inflation portrays a circumstance in which the value of money experiences an immense fall. When inflation is high, investors have little money to invest, and the companies will also suffer because of the rising cost in the economy and lead to a fall in the share market. 
  • Global Economy: the global economy and politics are also responsible for the downfall of Sensex and Nifty. Recession is the best example that impacts the global economy, so the performance of indexes.

Conclusion 

In the end, we can conclude that the Nifty and Sensex are the two major indices of the stock market in India. Both these indexes tell the strength of the share market with many similarities.

Though the difference between Sensex and Nifty is that they are designed to predict 30 and 50 companies’ performance, respectively, the base value of the index for Sensex is 100 and for the Nifty is 1000.

Sensex is the part of the older exchange which is Bombay Stock exchange whereas Nifty is the part of National Stock Exchange. Understanding the difference between two gives you an idea to enter or exit the market.

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