This article is part 3 of the Basics section of our Stock Market Learning series created by SMJ. It offers a clear and straightforward explanation of Nifty and Sensex, two essential indices in the Indian stock market. What these indices are, how they function, the differences between them, and their significance. Our goal is to help beginners grasp these fundamental concepts and feel more confident about trading and investing in the stock market.
Nifty and Sensex are crucial benchmarks that traders and investors rely on daily to gauge market trends and make informed decisions. But what exactly are Nifty and Sensex? How do they differ from each other, and most importantly, how are they calculated? To answer these questions, we first need to understand the concept of an index.
An index serves as a key indicator in the financial markets, providing a snapshot of market performance by tracking a selected group of stocks. This allows investors to assess market trends quickly and efficiently without the need to analyze each individual stock, which would be time-consuming and impractical given the sheer volume of listed stocks.
Also Read: What is the Stock Market & How Does It Work?
What is an Index?
An index is a statistical measure that represents the performance of a group of stocks, providing a snapshot of market trends and overall economic health. Market experts use indices to track and evaluate the movements of selected stocks without analyzing every single listed stock, which would be impractical given the thousands of stocks available.
The primary purpose of an index is to provide a benchmark for measuring the performance of specific segments of the market or the market as a whole. This helps investors and analysts understand market trends, compare the performance of individual stocks or portfolios against the market, and make informed investment decisions.
An index is composed of a sample of companies selected from various industries to act as representatives of the market. These companies, known as index constituents, are chosen based on specific criteria like market capitalization, liquidity, and industry representation. By selecting a diverse group of stocks, an index aims to reflect the overall performance and trends of the broader market.
Instead of evaluating every stock in the market, an index picks a representative sample, similar to tasting a few apples to judge the quality of the entire batch. This approach provides a more manageable and accurate way to gauge market trends.
Indices do not focus solely on one industry. Instead, they include stocks from multiple sectors such as technology, finance, healthcare, and consumer goods. This diversified approach ensures that the index provides a comprehensive view of the market’s performance, rather than reflecting the trends of a single industry. This broad representation helps investors understand how different sectors are performing relative to each other and the overall economy.
What are Sensex and Nifty?
In India, two primary stock exchanges dominate the financial landscape: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). To measure the performance of these exchanges, each has its own benchmark index: Sensex for the BSE and Nifty for the NSE.
What is Sensex?
Sensex, short for the Sensitive Index, is the benchmark index for the Bombay Stock Exchange (BSE), one of the oldest and most significant stock exchanges in India. Established in 1986, Sensex is a vital indicator of the Indian stock market’s overall performance and serves as a barometer for the health of the Indian economy.
Purpose of Sensex
The primary purpose of Sensex is to provide a snapshot of market trends and investor sentiment. By tracking the performance of a select group of 30 prominent companies listed on the BSE, Sensex reflects the overall movement and trends in the market. These companies are chosen based on their market capitalization, liquidity, and industry representation, ensuring a comprehensive overview of the market’s performance.
Criteria for Inclusion in Sensex
To be included in the Sensex, a company must meet specific criteria set by the Bombay Stock Exchange. These criteria ensure that only the most influential and liquid stocks are part of the index.
Market Capitalization: Companies with a high market capitalization are preferred, as they have a significant impact on the market.
Trading Frequency – Stocks that are traded frequently are included to ensure the index accurately reflects market activity.
High Liquidity – Companies with high liquidity are selected to facilitate easy buying and selling of shares.
Industry Representation – The selected companies represent a broad spectrum of industries to provide a balanced view of the market.
Average Daily Turnover – Companies with a high average daily turnover are chosen to ensure active market participation.
Composition of Sensex
Sensex comprises 30 of the largest and most actively traded companies on the BSE. These companies come from various sectors, including finance, information technology, healthcare, consumer goods, and more. By including companies from diverse industries, Sensex provides a comprehensive picture of the market’s performance and helps investors understand trends across different sectors.
Importance of Sensex
Sensex is widely regarded as a critical indicator of market sentiment and economic health in India. Investors, analysts, and policymakers closely monitor Sensex to gauge market trends, make investment decisions, and formulate economic policies. When the Sensex rises, it indicates bullish market conditions, reflecting investor confidence and economic growth. Conversely, a declining Sensex signals bearish market trends, indicating investor caution and potential economic challenges.
What is Nifty?
Nifty, formally known as the Nifty 50, is the benchmark index for the National Stock Exchange (NSE) in India. Established in 1996, Nifty serves as a crucial indicator of the Indian stock market’s performance, reflecting the overall health and trends of the market. It is a key tool for investors, analysts, and policymakers to understand market movements and make informed decisions.
Purpose of Nifty
The primary purpose of Nifty is to provide a comprehensive overview of the stock market by tracking the performance of 50 of the largest and most liquid stocks listed on the NSE. These stocks are selected based on various criteria to ensure they accurately represent the market. By following Nifty, investors can gauge market trends and gain insights into the broader economic landscape.
Criteria for Inclusion in Nifty
To be included in Nifty, companies must meet specific criteria that ensure only the most relevant and impactful stocks are part of the index.
Liquidity – Companies must have a high level of liquidity to be included, ensuring that their stocks can be easily bought and sold.
Float Adjustment – The freefloat market capitalization of the company is considered, which accounts for the shares available for trading by the public.
Domicile – The company must be domiciled in India, ensuring it is a significant player in the Indian economy.
Composition of Nifty
Nifty comprises 50 companies from various sectors, including information technology, financial services, consumer goods, automobiles, telecommunications, and more. This diverse selection ensures that Nifty provides a well-rounded view of the market, capturing the performance of different industries and reflecting the overall market sentiment.
Importance of Nifty
Nifty is widely recognized as a vital indicator of market performance and economic health in India. Investors, analysts, and policymakers rely on Nifty to –
- Nifty helps identify bullish or bearish market trends, guiding investment decisions.
- Investors use Nifty as a benchmark to compare the performance of their portfolios and individual stocks.
- Policymakers monitor Nifty to understand economic trends and formulate policies that can foster economic growth and stability.
Sectors Represented in Nifty
Nifty covers a broad range of sectors to provide a comprehensive picture of the market.
Information Technology – Companies like Infosys and TCS.
Financial Services – Companies like HDFC Bank and ICICI Bank.
Consumer Goods – Companies like Hindustan Unilever and ITC.
Automobiles – Companies like Maruti Suzuki and Tata Motors.
Telecommunications – Companies like Bharti Airtel.
Also Read: Stocks vs. Mutual Funds: The Key Differences and Choosing the Right One
Differences Between Sensex and Nifty
Although both Sensex and Nifty serve as key indicators of the Indian stock market’s performance, they differ in several aspects, including their composition, history, and the exchanges they represent.
| Feature | Sensex | Nifty |
| Year of Incorporation | 1986 | 1996 |
| Former Names | S&P BSE SENSEX | CNX Fifty |
| Number of Companies | 30 | 50 |
| Number of Sectors | 13 | 24 |
| Index Calculation Method | Free-Float Calculation | Free-Float Calculation |
| Operated by | Bombay Stock Exchange | India Index Services and Products (NSE Subsidiary) |
| Volume and Liquidity | Low | High |
How to Calculate Sensex and Nifty?
Understanding how Sensex and Nifty are calculated provides valuable insights into how these indices reflect market performance. Both indices use the freefloat market capitalization method, but there are specific steps involved in their calculations.
How to Calculate Sensex?
1. Calculate Market Capitalization of Each Company
Market Capitalization = Current Market Price × Number of Outstanding Shares.
2. Determine FreeFloat Market Capitalization
FreeFloat Market Capitalization = Market Capitalization × FreeFloat Factor.
The freefloat factor represents the proportion of shares available for trading by the public.
3. Sum of FreeFloat Market Capitalization
Add the freefloat market capitalization of all 30 companies to get the total freefloat market capitalization.
4. Sensex Formula
Sensex Value = (Total FreeFloat Market Capitalization / Base Market Capitalization) × Base Value of Sensex.
The base market capitalization and base value are set during the inception of Sensex (197879 with a base value of 100).
Example Calculation
Assume the total freefloat market capitalization of the 30 companies is ₹50 trillion and the base market capitalization is ₹500 billion. The base value of Sensex is 100.
Sensex Value=(₹50 trillion/₹500 billion)×100=10,000
How to Calculate Nifty?
1. Calculate Market Capitalization of Each Company
Market Capitalization = Current Market Price × Number of Outstanding Shares.
2. Determine FreeFloat Market Capitalization
FreeFloat Market Capitalization = Market Capitalization × Investable Weight Factor (IWF).
IWF represents the proportion of shares available for trading by the public.
3. Sum of FreeFloat Market Capitalization
Add the freefloat market capitalization of all 50 companies to get the total freefloat market capitalization.
4. Nifty Formula
Nifty Value = (Total FreeFloat Market Capitalization / Base Market Capitalization) × Base Value of Nifty.
The base market capitalization and base value are set during the inception of Nifty (November 3, 1995, with a base value of 1000).
Example Calculation
Assume the total freefloat market capitalization of the 50 companies is ₹60 trillion and the base market capitalization is ₹600 billion. The base value of Nifty is 1000.
Nifty Value=(₹60 trillion/₹600 billion)×1000=100,000
By familiarizing yourself with Nifty and Sensex, you can gain a deeper insight into market movements and better understand the economic health of the country. As you continue your journey in stock market investing, keeping an eye on these indices will help you stay informed and confident in your investment strategies.
This article is a very basic step in understanding the stock market & other investment opportunities. You may not grasp all the terminology or points mentioned. Follow the entire series to gain a comprehensive understanding and become a knowledgeable trader or investor.
The article is for educational purposes, we do not recommend any specific stocks or encourage jumping into the stock market without thorough research and understanding.
