What are Nifty and Sensex?

Do you remember when was the first time you heard these words – Sensex and Nifty ? Around high school. But since then how many of you know this to a good depth ?

Again very few of you. But don’t worry. My only reason of writing this post is to make you easily understand What is Nifty and Sensex incluiding me.

You can refer to the table of contents to get to a specific section of your interest.

One small request to all of you reading this article if you like this or any part of the article.

Please comment and give me your suggestions. You may not realize it but as for now only this is keeping me to writing.

Now without any further ado, lets get into our today’s post What is Nifty and Sensex ?

What is Nifty?

Nifty stands for National Stock Exchange Fifty. It is a blended word – National Stock Exchange and Fifty coined by NSE on 21st April 1996. NIFTY 50 is a benchmark based index and also the flagship of NSE, which showcases the top 50 equity stocks traded in the stock exchange  out of a total of 1600 stocks.

NCE Indices had a marketing and licensing agreement with Standard & Poor’s for co-branding equity indices until 2013. The Nifty 50 index was launched on 22 April 1996 and is one of the many stock indices of Nifty.

A short history of Nifty

On 22 April 1996 the Nifty was launched. Below is the table that will give information about Nifty 50 in broad way.

TOP 50 Companies in NIfty in 2020

Top 50 Companies in Nifty

What are Sensex and Nifty?

The BSE Sensex or Sensex is a free float market weighted stock market index of 30 well established and financially stable companies listed on Bombay Stock Exchange.

Sensex constitutes 30 companies which are some of the largest and most actively traded stocks, are representatives of various industrial sectors of the Indian Economy.

When was Sensex launched?

Sensex was published on 1 Jan 1986, the S&P BSE Sensex is regarded as the pulse of domestic stock markets in India.

The base number was taken as 100 on 1 April 1979 and its base year is 1978-79.

The term Sensex was given by Deepak Mohani, a stock market analyst in 1989. Sensex is merged word of Sensitive and Index.

To know in details about these constituents, you can visit this site.

30 Constituents as of July 2020

Constituents of Sensex

PIE CHART FOR BETTER UNDERSTANDING NIFTY

NIFTY 50 Pie chart

Difference between Nifty and Sensex

As such, there is no main difference between Sensex and Nifty as both targets towards large cap stocks. Both Nifty and Sensex are indices of stock market that indicate the strength of the market. The Nifty reflects the value of National Stock Exchange (NSE) whereas Sensex is the stock market index for Bombay Stock Exchange (BSE).

Nifty is broader as it consists of more listed securities i.e. 50 stocks whereas Sensex contains 30 stocks.

The major difference between Nifty and Sensex is the number of stocks each company comprises. Nifty 50 includes stocks from the top 50 of nearly 1600 companies actively traded in NSE across 24 sectors.

Sensex is the oldest from Nifty. BSE introduced it in 1986 when this used to follow the weighted market capitalization method. Later in 2003, Sensex migrated to free-float market capitalization method.

the base value of Nifty is 1000 and 1995 is calculated as its base year for calculation.

The NIFTY 50 covers major sectors of the Indian economy and offers investment managers exposure to the Indian market in one efficient portfolio.

PIE CHART FOR BETTER UNDERSTANDING SENSEX

Sensex Pie Chart with Weightage

Understanding the Free Float method

Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market.

It generally excludes promoters’ holding, government holding, strategic holding, and other locked-in shares that will not come to the market for trading in the normal course.

Major factors that affect the performance

So many factors are responsible for change. Whenever there is a slowdown in the economy, there is affect in the market too.

(A) Interest rate

When the interest rates are increased, the borrowing cost for companies increases. To compensate this, the companies cut their expenses in many ways. This affects the company’s earnings and as a result the stock markets fall.

(B) Inflation rate

When there is high inflation, investors do not have a surplus amount that can be used for investment purposes. Companies also suffer as they should pass on the higher input costs to the consumers.

(C) Global economy

A recession in the global economy will affect the stock markets. Other factors that impact the stock market are crude oil prices, rupee depreciation, political instability, etc.

How to calculate NIFTY?

Nifty 50’s calculations follows following steps:-

STEP 1 –

Derive the market capitalization of the constituents by multiplying the number of shares with their prices.

Market capitalisation = Outstanding shares x price

STEP 2 –

Determine the free-float market capitalisation, one needs to multiply the Investable Weight Factor (IWF) with the original market capitalisation. 

Free-float market capitalisation = Market capitalisation x IWF

IWF represents the proportion of shares that investors can freely trade in the stock market. In other words, directors or promoters of a company holds the percentage of shares.

STEP 3 –

Calculate the index value by dividing the current market value by base market value and then multiplying it by the base index value (1000). 

Index value = (Current market value / Base market capital) x 1000

Note: The base market capital of Nifty is Rs.2.06 trillion.

How to calculate SENSEX?

Sensex follows a methodology similar to that of Nifty. A free-float market capitalization method is used to calculate Sensex. Therefore, akin to Nifty, this index is also reflective of the total market value of the 30 constituents in relation to its base period, i.e. 1978-79. 

Moreover, each constituent must have a weight regarding free-float, which is 0.5% of said index. Alongside these criteria, a company’s stocks should have a trading history of at least 1 year and must have traded on every trading day of that period to qualify as a constituent. 

For calculating Sensex,

STEP 1

Calculate the market capitalization of each company applying the same formula as mentioned above (in NIFTY section).

STEP 2

Calculate the free-floating market capitalization one needs to multiply the derived market capitalization with a free-float factor. 

Free-float market capitalisation = Market capitalisation x free-float factor

STEP 3

The free-float market capitalisation of those 30 companies shall be divided by the index divisor of 100. 

Index value = Free-float market capitalisation / Index divisor

This index divisor is what establishes the relationship between the base period and the current period. Furthermore, that divisor also facilitates comparison across different periods. 

What is Nifty and Sensex?

Nifty stands for National Stock Exchange Fifty. Nifty is a standard or benchmark of the Indian Stock Market Index that represents the weighted average of 50 of the largest Indian Indian companies listed on the National Stock Exchange
Sensex is a free-float market-weighted stock market index of 30 well established and financially stable companies listed on the Bombay Stock Exchange.

What is the Base value of Nifty and Sensex?

Base value of Nifty is 1000 and Sensex is 100.

Difference between Nifty and Sensex?

The major difference between Nifty and Sensex is the number of stocks each company comprises. Nifty 50 includes stocks from the top 50 of nearly 1600 companies actively traded in NSE across 24 sectors.

Who named Sensex?

Deepak Mohani, a stock analyst gave this name and it is merged name of word sensitive and index.

Which method used to calculate Nifty and Sensex?

Free float weighted average market method.

What are top 5 companies in Nifty?

Yes Bank Share Price.
Reliance Industries Share Price.
State Bank of India Share Price.
Tata Motors Share Price.
HDFC Bank Share Price.

Last few words..

I hope that this post gave you some knowledge and understanding of Nifty and Sensex. Please share and check previous post that are related to today’s topic:-

What is Index Funds?

What are Mutual Funds?

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