Difference Between Sensex and Nifty

Sensex and NIFTY are probably the top two names on the tongue of every stock investor! However, many people still face a hard time distinguishing the two. While they both are two of the biggest indices in India, there’s a lot that differentiates them. The differences between these two vary from the number of stocks to the authorities holding these indices.  

 

This blog will help you significantly in understanding both the Indian indices and learning what makes them different from each other! All in all, In this blog, we’ll discuss everything you need to know about these two indices. 

Read on if you want to know about:

• What is Sensex
• What is NIFTY
• Difference between Sensex and NIFTY
• Similarities between Sensex and NIFTY

So, without any further ado, let’s get started!

What is Sensex?

To make it simpler to understand the concept of Sensex, let’s answer all your doubts one after another! 

What’s the Definition of Sensex? 

Sensex is a combination of two words – “Sensitive” and “Index”. Simply stated, Sensex is a basket of the top 30 stocks in India listed under the Bombay Stock Exchange. For BSE, Sensex denotes the benchmark index for all the stocks in India. Therefore, if any change in the supreme Sensex happens, the stock market also shambles. 

What’s the Origin of Sensex? 

On January 1, 1986, Deepak Mohani, a popular stock market analyst of his time, convinced the idea of Sensex to the Bombay Stock Market. At that time, the initial point value of the BSE Sensex was around 750 points. The oldest stock index in India, Sensex proves to be of great help for exploring stock data from the past as it provides time series data from as early as 1979. 

What’s the Methodology for the Calculation of Sensex? 

As of now, the Bombay Stock Exchange calculates the Sensex based on the Free Float Market Capitalization Method. However, before 2003, a different weighted methodology of market capitalization was used to calculate the Sensex. 

The free float market capitalization method is based on the idea of counting only the “available-for-sale” shares of a company and excluding the outstanding shares for calculating the index. 

Let’s understand the formula:

Free Float Market Capitalization = Market Capitalization X Free Float Factor.

Here, 

• Market capitalization is simply the current market value of the company (Share Price/Share* Number of share endowed by the company)
• The free float factor is the percentage of the total shares that the company has issued for sale and are available in the market to trade. (Note: shares that belong to the government and are not available for the common public to trade don’t get counted in the free float factor)

Now that you know about the Free Float Market formula, here’s how to calculate the Sensex –

Sensex Value = (Total free-float market capitalization/ Base market capitalization) * Base period index value 

Note: The base year for Sensex is 1978-79.

Composition of Sensex India

The Sensex index is composed of 30 top Indian stocks and the composition varies a lot:  

What is the importance and relevance of the Sensex?

From stock market investors to Indian economy analysts, they all highly rely on the Sensex to understand the fluctuation in the Indian Stock Market as well as in the Indian economy. As the Sensex compromises the top 30 companies in the Bombay Stock Exchange, any change in the Sensex also influences the stock market and the Indian economy. Therefore, Sensex is considered a highly crucial tool for investors to make informed investments. 

What is NIFTY?

Let us now move forward to the second henchman of national indices, NIFTY. 

From what NIFTY is to how it affects the Indian Stock Market, we’ll discuss it all in the upcoming section. Read on!

What is the Definition of NIFTY?

NIFTY, as the name suggests, is the combination of the National Stock Exchange and Fifty. The NIFTY 50 market index is comprised of the top 50 equity stocks traded in the stock exchange (P.S. There are a total of 1600 stocks). 

The top 50 stocks in the NIFTY 50 come from the 12 Indian sectors, which include services such as information technology, automobiles, cement products, financial services, consumer goods, entertainment and media, telecommunications, metals, etc. 

What is the Origin of NIFTY?

The National Stock Exchange or NSE introduced the NIFTY market index on 21st April 1996. The Indian Index Services and Products (IISL), a subsidiary part of the National Stock Exchange Investment Corporation owns the NIFTY market index and regulates all the functions of the market index.   

What’s the Methodology for the Calculation of NIFTY? 

While the Sensex is calculated on the Free-Float method, NSE Indices Limited takes use of the float-adjusted and market capitalization-weighted method.

The formula for NIFTY is as follows: 

Index value = Current MV or market value / (Base Market Capital * 1000)

For NIFTY, the base period is the 3rd of November, 1995 and the base value is 1000. FYI: the base capital for NIFTY is 2.06 trillion as of now. 

The NIFTY share market index is a benchmark standard against which all equity markets in India are measured. Therefore, NSE conducts regular index maintenance to ensure that it remains stable and persists as the benchmark in the Indian stock market context.

Importance and Relevance of the Nifty

As already discussed above, NIFTY 50 is a highly influencing market index with the 50 largest and actively traded stocks of the National Stock Market. Therefore, any fluctuation in the NIFTY 50 index directly affects the Indian economy and stock exchange. 

Moreover, like the Sensex, investors,capitalization-weighted and analysts also use the NIFTY market index as a solid benchmark for investments in stocks and mutual funds. 

Difference Between Sensex and Niftycapitalization-weighted

Here’s what differentiates Sensex and Nifty:

Similarities between Sensex and Nifty

While the Sensex and NIFTY are quite different from each other, they still hold some remarkable similarities: 

• Sensex as well as the NIFTY are two of the biggest Indian indices and can highly affect the performance of the Indian economy. 
• Both Sensex and NIFTY are used by investors and analysts as the Indian stock benchmark to read the trends and make investments. 
• One major similarity between the two indices is the real-time update of indices. 
• Both Sensex and NIFTY consist of top companies from the Indian economy sector. 

Conclusion

So with that, we end our thorough discussion on Sensex and NIFTY. We hope you remember the key points:

• Sensex is the stock index of the top 30 companies in the BSE while NIFTY is of the top 50 companies listed for trading in the NSE
• Sensex and NIFTY both are crucial for the Indian stock market and economy. Any fluctuation in both can affect the Indian stock market. 
• Both BSE and NSE use different methods to calculate their indices. 
• Studying and analyzing these indices can prove to be very beneficial before investing in stock and mutual funds.

Did this article pique your interest? Or did we miss anything? Share your thoughts in the comments and let us know if there’s anything else we should’ve included. 

FAQs

1. How are Sensex and NIFTY related to the Indian economy?

Both Sensex and NIFTY have huge importance when it comes to the Indian economy. As these two are the biggest Indian stock indices and consist of the top 30 and top 50 stocks of the Bombay Stock Exchange and the National Stock Exchange respectively, any fluctuation in them can immensely influence the Indian economy. Indian economy analysts also rely on Sensex and NIFTY to understand and predict Indian economic patterns. Moreover, not only the Indian economy but the Indian stock market also gets highly influenced by changes in Sensex and NIFTY. All in all, Sensex and NIFTY both hold great importance to the Indian economy!

2. How often do Sensex and NIFTY values change?

Sensex is calculated on the basis of the free float market capitalization method. As per this method, Sensex Value = (Total free-float market capitalization/ Base market capitalization) * Base period index value.

The Sensex value is calculated through this method after every six months. Generally, the calculation is done in the month of June and December. 

The NIFTY calculation is done on the basis of the Free-Float method. As per this method, Index value = Current MV or market value / (Base Market Capital * 1000).

The NIFTY value calculation is also done every six months around the time of June and December. 

All in all, the value of Sensex and NIFTY changes every six months!

3. What are the advantages of investing in Sensex?

Investing in Sensex can prove to be a financially rewarding decision, with several advantages at hand for a potential investor. One of the primary benefits of investing in Sensex is the diversification it provides, as it represents a basket of 30 leading companies across various industries in the Indian economy. 

By investing in this index, you essentially spread your risk across multiple sectors, making it a safer bet than investing in individual stocks. 

Additionally, Sensex acts as an excellent barometer of the Indian market, enabling investors to track and gauge the overall market sentiment. This knowledge can aid investors in making informed decisions about their investments, while also minimizing potential losses.