It does not require one to be conversant in the ways of stock markets to come across the terms Sensex and Nifty.
These two indexes rise and fall from time to time, corresponding to overall economic conditions in the country. Indeed, the sign of a healthy economy is characterized by a thriving investment culture. That culture then translates to heightened investor confidence, which, in turn, is reflected in market indexes Sensex and Nifty.
Nonetheless, there are specific points of difference between Sensex and Nifty and similarities that investors need to learn to understand the stock market more comprehensively.
However, before delving into the nitty-gritty of Nifty vs Sensex, a detour to understand market index as a concept is also critical.
In this article
What is an Index?
Generally, an index is a measure or indicator of the overall performance of a basket of homogenous items. In the context of the stock market, an index is the statistical indicator of change in the performance of securities that can replicate a specific market area.
Market indices account for an array of conditions that influence the prices of securities to measure their value.
Investors use said index to contrast performance across a specific period. Broad-market indexes capture the performance of multiple industries; whereas there are indexes that only account for a specific industry.
Both Nifty and Sensex are broad-market indices that function on free-float market capitalisation methodology. Thus, the reason these indexes are considered as economic barometers.
What is Nifty?
Nifty stands for National Stock Exchange Fifty and is the equity benchmark index of the National Stock Exchange (NSE). It was introduced by NSE in 1996, and its other aliases are Nifty 50 and CNX Nifty.
One of the most critical points of difference between Sensex and Nifty is the number of stocks each index comprises. Nifty 50 includes stocks from the top 50 of nearly 1600 companies actively traded in NSE across 24 sectors.
These 50 stocks account for nearly 65% of the total free-float market capitalisation of the index. Thence, Nifty reflects the performance of those top 50 stocks.
Nifty 50 is primarily used for benchmarking index funds, index-based derivatives, and fund portfolios. Index Services and Products Limited (IISL), a subsidiary of NSE, owns and manages Nifty. Furthermore, the base value of Nifty 50 is 1000 and 1995 is considered as its base year for calculation of the index per float-adjusted market capitalisation methodology.
What is Sensex?
Another critical point in illustrating Sensex vs Nifty is that the former constitutes of the top 30 companies trading in BSE as compared to Nifty that comprises the top 50 companies.
Furthermore, Sensex is the older of these two indexes. The Bombay Stock Exchange introduced it in 1986 when this index followed a weighted market capitalization method. Later in 2003, Sensex migrated to the free-float market capitalisation method. The base value for calculating Sensex is 100 – another critical difference between Sensex and Nifty – and 1978-79 is the base year considered for its calculation.
How to Calculate Nifty?
The Nifty calculation takes place as per the free-float market capitalisation weighted methodology. Thus, it represents the total market value of the constituents in Nifty in relation to the base period, i.e. 3rd November 1995.
Companies included for its calculation must be featured in the Nifty 100 index as well. Other than that, Nifty 50 constituents must sport a 0.5% or less average impact cost for a period of 6 months for a portfolio of Rs.10 crore for 90% of the observation.
To calculate the Nifty index, firstly one needs to derive the market capitalization of the constituents by multiplying the number of shares with their prices.
Market capitalisation = Outstanding shares x price
Secondly, to 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, it is the percentage of shares not held by directors or promoters of a company.
Thirdly, one needs to 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.
This index denotes the returns an investor can earn if they invest in that specific portfolio.
How to Calculate Sensex?
Sensex follows a methodology similar to that of Nifty. Sensex is calculated based on a free-float market capitalisation method. 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.
Furthermore, companies that are included in the calculation of this index must be existing participants in the top 100 list of BSE per market capitalisation. 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, it is first required to calculate the market capitalisation of each company applying the same formula as mentioned above. Secondly, to calculate the free-floating market capitalisation one needs to multiply the derived market capitalisation with a free-float factor.
Free-float market capitalisation = Market capitalisation x free-float factor
Lastly, to compute Sensex, 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.
Similar to Nifty, Sensex also reflects the returns one could earn by investing in that portfolio. Therefore, investors could weigh Sensex vs Nifty returns.
What is the Difference between Sensex and Nifty?
Despite the similarities they share by virtue of being broad-market indexes, there are a few pointers to Sensex vs Nifty that one ought to note. The following table enumerates the differences between these two market indexes.
|Full-form||National and Fifty||Sensitive and Index|
|Aliases||Nifty 50 and S&P CNX Fifty||S&P BSE Sensex|
|Owned by||It is both owned and managed by Index and Services and Products Limited (IISL), an NSE subsidiary.||It is owned by the Bombay Stock Exchange (BSE).|
|Base number||Its base number is 1000||Its base number is 100|
|Base period||Its base period is 3rd November 1995.||Its base period is 1978 – 79.|
|Base capital||Rs.2.06 trillion||N/A|
|Number of constituents||Nifty 50 constitutes of the top 50 companies that are actively traded in NSE.||Sensex comprises the top 30 companies actively traded in BSE.|
|Number of sectors covered||Nifty is a broader market index that covers 24 sectors.||Sensex covers 13 sectors.|
Learning points of similarity and difference between Nifty and Sensex as well as their nuances can allow investors to deal more deftly in indexes.