Difference Between Sensex and Nifty

‘Sensex has gone up 100 points’ or ‘Nifty has fallen by 200 points’ we all hear it frequently in our daily lives. Sensex and Nifty are barometers of country’s financial health as they reflect market trends, investor confidence and overall economic condition of India. 

 

 

what is sensex and nifty?

Sensex and Nifty are benchmark indices of Bombay Stock Exchange and National Stock Exchange respectively. Although both the indices are quite similar in many ways still, they are different in many aspects which you should know about to understand the dynamics of the Indian stock market. In this blog we will highlight the key differences between Sensex and Nifty and how are they calculated: 

 

 

Difference between Sensex and Nifty 

Here are some of the prominent differences between Sensex and Nifty:  

 

 

 

Why do we need an Index? 

It is almost impossible to analyze the performance of each and every stock listed on the exchanges as there are thousands of them and by the time we complete the analysis, the data could even change.  

Therefore, to identify market trends, we pick a sample of companies from various industries based on certain factors which act as representatives. This sample of companies is known as an Index and the companies under it are index constituents. The stocks in the index are not from a specific industry but from varied industries, which is why it gives us a fair picture of the market conditions. 

 

 

What is Sensex? 

Sensex, or Sensitive Index, is a benchmark for the Bombay Stock Exchange (BSE) that measures 30 of India's top companies' performance. Due to the impracticality of looking at all the more than 6,000 firms listed on the BSE, the Sensex offers a representative sample of the market.  

The 30 firms are selected on the basis of market capitalization, trading volume, liquidity, and industry representation. The performance of the Sensex is a barometer of the market trend. An increasing Sensex is an indicator of a bullish market, and a falling Sensex is an indicator of a bearish market. 

 

 

How is Sensex calculated? 

Sensex, or the Sensitive Index, is based on the free-float market capitalization method of calculation. This calculates its basis on freely traded shares among the top 30 listed entities on the Bombay Stock Exchange (BSE) and not shares held by sponsors.  

Following is a simplified version of the process: 

 

Calculate Free-Float Market Capitalization: 

• Market Capitalization: Find out the market price of each business by multiplying the share price with outstanding shares. 
• Free-Float Market Capitalization: Compute the market value of freely traded shares alone, excluding promoter-held shares. 

 

Calculation of Sensex:  

The first step is the addition of the free float market capitalization of all 30 companies. 

Further divide this total by the base market capitalization (a fixed value of 1978-79). 

Next and the last step is to multiply the quotient by the base index value. 

 

Some of the important elements of this computation are:  

Summary of Free-Float Market Cap: The total free-float market capitalization of all 30 constituents of the index. Free-float market capitalization counts only the portion of shares that are available for public trading, not those in the hands of promoters, insiders, and other restricted parties. 

Base Market Cap: The aggregate market capitalization of all 30 stocks at the base year of the index (1978-79). 

Base Index Value: A random figure that is attributed to the Sensex in the base year, which is normally 100. 

 

 

What is Nifty? 

The Nifty, or National Stock Exchange Fifty, is a leading index of the Indian stock market. Although the Sensex is an index of 30 companies, the Nifty tracks the movement of 50 of the largest and most liquid companies of the National Stock Exchange (NSE). The companies are selected with care from various industries, including IT, consumer goods, finance, automobiles, and telecommunication, to provide a broad base of the Indian economy. 

 

Key requirements to be included in the Nifty index are: 

Liquidity: Sufficient number of trades and liquidity to purchase and sell the shares. 

Free Float: The proportion of shares available for public trading, excluding those owned by insiders and promoters. 

Domicile: Companies must be domiciled and registered in India. 

Nifty is a crucial benchmark of the Indian share market that represents the overall condition and performance of the Indian share market. 

 

Calculation of Nifty 

The Nifty 50 Index, a National Stock Exchange (NSE) index, tracks the performance of India's largest and most liquid 50 companies. It applies a free-float market capitalization-weighting approach, i.e., it employs only publicly floating shares (and not promoter-held shares) for its calculation. 

  

Key Calculation Steps:  

Compute Free-Float Market Capitalization: For each of the 50 component stocks, calculate the free-float market capitalization by taking the product of the price of a share and publicly available shares. 

 

Calculate Nifty 50: 

Sum the free-float market capitalization of the entire 50 stocks. 

Take this figure and divide it by the base market capitalization (initial market capitalization of the index when launched= 1995). 

Multiply the outcome by the base index value (most commonly set at 1000). 

This method enabled the Nifty 50 to depict the real market worth of dealt shares so that it might give a strong image of Indian stock market performance. 

 

 

Conclusion 

The most basic difference between the Sensex and Nifty is the number of constituent companies. The Sensex, which tracks 30 blue chip companies on the Bombay Stock Exchange (BSE), is to be contrasted with the Nifty, which covers 50 blue chip companies on the National Stock Exchange (NSE). While the Nifty generally tends to be more volatile, past experience indicates that historically the Sensex has recorded better overall returns compared to the Nifty.