If you are interested in the Indian stock market, you might have heard about Nifty and Sensex.
These two terms are frequently used in the financial world, but many people still don't understand what they are and how they work.
In this article, we will explain the meaning of Nifty and Sensex, how they are calculated, and their significance in the Indian stock market.
Introduction to Nifty and Sensex
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two major stock exchanges in India.
NSE's index is represented by Nifty, while BSE's index is represented by Sensex.
These indexes represent the performance of the stock market, and they are calculated based on the market capitalization of the companies listed on these exchanges.
What is Nifty?
Nifty is also known as the Nifty 50, representing the performance of the top 50 companies listed on the NSE.
These companies come from various sectors, including banking, information technology, manufacturing, etc.
The index is calculated using the free-float market capitalization-weighted method, which means that companies with higher market capitalization have a higher weightage in the index.
History of NIFTY 50
The index was launched in 1996, and since then it has become one of the most widely tracked equity indices in India.
The Nifty 50 index has undergone several changes and modifications since its launch. In 2004, the index was rebranded as the Nifty 50, which is a reference to the index's original 50 constituent stocks.
In 2008, the Nifty 50 was divided into two sub-indices, the Nifty Junior and the CNX 100, which allowed investors to track the performance of mid-cap and large-cap companies separately.
In 2015, the NSE introduced a new version of the Nifty 50 index, known as the Nifty 50 Total Returns Index.
This index includes the dividends paid by the 50 companies in the index, in addition to their stock price performance, providing a more comprehensive measure of the total returns generated by the index.
Today, the Nifty 50 index is widely used as a benchmark by investors and financial institutions in India and abroad.
It is also used as a basis for the creation of various index funds and exchange-traded funds (ETFs) that track the performance of the Indian equity market.
Here is a table of the 50 companies that are part of the Nifty 50 index, along with their industry type:
Note: The information in this table is accurate as of my knowledge cutoff date of September 2021. Please keep in mind that the companies included in the Nifty 50 index can change over time.
What is Sensex?
Sensex, on the other hand, represents the performance of the top 30 companies listed on the BSE.
These companies are also from various sectors, and they are chosen based on certain criteria like market capitalization, liquidity, and trading frequency.
The index is calculated using the market capitalization weighted method, which means that the companies with higher market capitalization have a higher weightage in the index.
History of Sensex
It was first introduced in 1986, with a base value of 100 points.
The Sensex index has undergone several significant changes throughout its history. In 1991, the index was heavily impacted by the economic reforms that were implemented by the Indian government.
In 1992, the index crashed by more than 50% due to the Harshad Mehta scam, which involved the manipulation of stock prices by a stockbroker.
In 2008, the global financial crisis caused the Sensex to fall sharply, with daily trading being suspended multiple times due to market volatility.
Despite these setbacks, the Sensex has remained one of the most widely tracked equity indices in India.
It is used as a benchmark by investors and financial institutions to evaluate the performance of Indian stocks and equity funds.
In recent years, the BSE has also launched several new indices, such as the BSE 100 and the BSE 500, which provide broader coverage of the Indian stock market.
Here is a table of the 30 companies that are part of the Sensex 30 index, along with their industry type:
Note: The information in this table is accurate as of my knowledge cutoff date of September 2021.
How are Nifty and Sensex calculated?
Both Nifty and Sensex are calculated using a formula that considers the market capitalization of the companies listed on the respective exchanges.
Market capitalization is calculated by multiplying the total number of shares of a company by its current market price.
The index is calculated using a formula that involves the following calculation:
Nifty = (Sum of (Market capitalization of each company in the index x Free Float Factor) / Base Market Capitalization) x Base Index Value
Sensex = (Sum of (Market capitalization of each company in the index) / Divisor)
The Divisor and Base Market Capitalization are adjusted periodically to maintain the continuity of the index.
Significance of Nifty and Sensex
Nifty and Sensex are important indicators of the performance of the Indian stock market. They are used by investors to gauge the overall health of the market and make investment decisions.
If the indexes are going up, it means that the market is bullish and investors are optimistic about the future. On the other hand, if the indexes are going down, it means that the market is bearish and investors are pessimistic about the future.
Difference between Nifty and Sensex
The key differences between Sensex and Nifty are as below:
Conclusion
Nifty and Sensex are the two most important indexes in the Indian stock market.
They represent the performance of the top companies listed on the NSE and BSE, respectively.
The indexes are calculated based on the market capitalization of the companies, and they are used as a barometer of the market's health.
Understanding the meaning of Nifty and Sensex is essential for anyone who wants to invest in the Indian stock market.
FAQs
- What is the difference between Nifty and Sensex?
Answer:- Nifty represents the top 50 companies listed on the NSE, whereas Sensex represents the top 30 companies listed on the BSE.
- How are Nifty and Sensex calculated?
Answer:- Both indexes are calculated using the market capitalization of the companies listed on the respective exchanges.
- What is the significance of Nifty and Sensex?
Answer:- Nifty and Sensex are important indicators of the health of the Indian stock market. They are used by investors to make investment decisions and to understand the overall direction of the market.
- How often are the Divisor and Base Market Capitalization adjusted for Nifty and Sensex?
Answer:- The Divisor and Base Market Capitalization are adjusted periodically to ensure the continuity of the indexes.
- Can Nifty and Sensex predict the future performance of the market?
Answer:- While the Nifty and Sensex can indicate the overall direction of the market, they cannot predict the future performance of individual stocks or the market as a whole.
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