At the time of writing, India has two stock exchanges – The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). You can trade on both these exchanges electronically (through your DEMAT account) and there are more than 7000 companies exchanged cumulatively on these exchanges. With so many companies on these exchanges, it is virtually impossible to understand the overall trend of the stock market. To enable this, each of these exchanges has an index. The Bombay Stock Exchange has the SENSEX and the National Stock Exchange has the NIFTY. The following article talks in-depth about these two indices and the Difference between Nifty and Sensex.
What is a Stock Index?
A stock index is a statistical aggregate that depicts the overall price movement of the companies listed in its exchange. The value of the index depends on specific characteristics of the market, and they measure the value of the portfolio. Investors use the value of these indices as a comparison to their portfolio holdings, and to compare market performance.
Typically, a stock index represents the movement of a select number of top companies listed on that exchange. These companies are well-known and established in the country. Through stocks, you can invest in these companies alone. But through mutual funds, you can invest in portfolios that mimic the stock market index too.
Let’s understand each index in greater detail.
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What is SENSEX?
SENSEX is short for Sensitive Index. The base value of the stock is 100, and the SENSEX includes the top 30 well-established companies listed on the Bombay Stock Exchange. These 30 companies are chosen based on their financial performances and soundness over the long term.
To calculate the value of the SENSEX index, the free-flow market capitalization method is used. Therefore, it is directly indicative of the performance of these 30 companies as a whole. Technically, the value of SENSEX is calculated by determining the market capitalization of each of these 30 companies and then multiplying it with a free-float factor value. This gives the free-float market capitalization, and this value is divided by the Index Divisor.
SENSEX was established in 1986 and is the oldest stock index in India. The 30 companies that it contains belong to various domains and industries.
Consider that the SENSEX index has only stocks from two companies, A and B. Let’s assume that out of 1000 shares of company A, 800 are available to the public. These available shares are called ‘free-floating’.
Let’s also assume that Company B has 1000 shares that are available to the public.
Let’s begin with considering that the price of one stock of Company A is INR 120, then the free-float market capitalization of the shares freely available to the public is INR 96,000 (120*800). Similarly, if the price of one stock of Company B is INR 200, then the free-float market capitalization of the shares freely available to the public is INR 200,000.
Thus, the sum of the free-float market capitalization of both the companies is INR 296,000.
Following this, note that the base index year of SENSEX is 1978-79. The value set for this year is 100. Suppose, the total free-float market capitalization at that time was INR 60,000, then the index value is 100.
Sensex Index Value= (Sum of Free-float market capitalization/Base market capitalization) * Base period index value.
So, today the index value will be 296,000 * (100/60,000) = 493.33. This will be the value of the index today.
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What is NIFTY?
NIFTY is short for National Stock Exchange Fifty. It is also known as CNX Nifty or the NIFTY 50. The index consists of the top 50 companies that are one of the most actively traded stocks on the National Stock Exchange. The index is owned by the India Index Services and Products. The base value of the NIFTY index is 1000, its value is also determined by the free-float capitalization method.
To calculate the price of the NIFTY index, the market capitalization of each of the 50 companies is first determined by multiplying the market price with the equity. The value is multiplied by the Investible Weight Factor (IWF). The value of NIFTY is calculated daily, by dividing the market value current by the base market capital, and the same is multiplied by 1000.
NIFTY index value Calculator=
Market capitalization = Shares Outstanding * Current Price
Free-float Market Capitalization = Market Cap * IWF
Index Value = (Current Market Value/Base Market Capital) * 1000
NIFTY is calculated in a similar manner to SENSEX. The only difference is that the base year is 1995, and the base index value is set to 1000.
The index was established in 1996, and it also contains companies belonging to multiple industries and domains.
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Nifty Vs Sensex
|1.||Acronym||National Stock Exchange Fifty||Sensitive Index|
|2.||Year of Incorporation||1996||1986|
|3.||Ownership||Index and Services and Products Limited, a subsidiary of NSE||Bombay Stock Exchange (BSE)|
|4.||Number of Companies in Its Portfolio||Top 50 most actively traded companies in the NSE||Top 30 most actively traded in the BSE|
|5.||Number of Sectors Covered||The index has companies across 24 sectors||The index has companies across 13 sectors|
|6.||Index Value Determination Method||Free-Float Market Capitalization Method||Free-Float Market Capitalization Method|
|7.||Base Value of the Index||1000||100|
|8.||Base Capital||INR 2.06 trillion||–|
|10.||Re-shuffling of Companies||Semi-annually in March and July||Semi-annually in June and December|
Final Thoughts – Nifty Vs Sensex
These are some typical differences between the two operating stock exchange indexes in India. If you want to get an idea of how the stock market is performing as a whole, you can view the charts of each of these indices and see how they have varied in value over the years. If you are an investor or budding to become one, the value of both NIFTY and SENSEX is going to influence quite a bit on your investment period and volume.
Frequently Asked Questions
What are SENSEX and NIFTY in the simplest terms?
Both indices are representatives of how well the top companies in each of the exchanges are performing. This gives an overall view of how well the economy is performing as well.
Is SENSEX better than NIFTY?
NIFTY is a broader index since it has more companies and sectors than SENSEX. According to historic data, SENSEX has performed better. But the value of each index is relative to how the companies it represents are performing.
Why is the SENSEX value higher than NIFTY?
Since NIFTY has a broader base of companies, the value is often less. But the purpose of both the indices is the same – to represent how the top companies are performing.
Do SENSEX and NIFTY trade on foreign exchanges?
Yes, Nifty 50 trades on the SGX or the Singapore Stock Exchange and the SME or the Chicago Mercantile Exchange. The SENSEX trades on EUREX and the stock exchanges present in the BRICS nations.
What are the limitations of SENSEX and NIFTY?
They represent companies that are not necessarily the biggest, and considering the overall number of companies on an exchange, the sample size from which their values are determined are too small.