When we need to guess the general market direction, we look at the market index. All the top stock exchanges worldwide have indices that depict market behaviour or investor sentiment. When general investors need an idea of market direction, they follow the indices. Upward or downward movement of indices indicate a bullish or bearish trend, respectively.
In India, Nifty and Sensex are important stock indices, which determine or depict the strength of the stock market. For equities, Sensex is the oldest market index, and includes shares from the top 30 companies listed on the Bombay Stock Exchange (BSE), representing roughly around 45 percent of the index’s free-float market capitalization. Nifty on the other hand includes shares from the top 50 companies listed on the National Stock Exchange (NSE), representing roughly around 62 percent of the index’s free-float market capitalization.
What is an Index?
The statistical aggregate that measures change, such as market performance or price movement is the index. Based on specific market characteristics, market indices calculate or measure the value of a portfolio of holdings, and investors use the market indices to compare performance, and use them as the basis for managing their investment portfolios.
There are two large cap indices in the Indian stock market, which are the S&P BSE Sensex, and the S&P CNX Nifty. On the basis of performance of both the indices, one can measure the changes in the market.
Sensex vs Nifty :
What is Sensex?
Known as the Sensitive Index, Sensex is the stock market index of the Bombay Stock Exchange (BSE). With a base value of 100, Sensex is the market-weighted stock index which includes shares from the top, well-established 30 companies, based on their performance and financial soundness. Furthermore, Sensex is calculated by using the free-float market capitalization method, and the performance of the 30 selected stocks is directly reflected by the level of the index.
The proportion of all the shares issued by companies that are readily available for trading to the general public in the market is known as free-float market capitalization. In the free-float market capitalization method, the market value of all the 30 selected stocks, relative to a base period is reflected by the index. Sensex is calculated by first determining the market capitalization of each of the 30 companies, and then multiplying it to the free-float factor, which provides the free-float market capitalization. It is then divided by the Index Divisor.
What is Nifty?
The National Stock Exchange Fifty (Nifty) is the stock market index of the National Stock Exchange (NSE). Also known as NIFTY 50 and CNX Nifty, it comprises 50 stocks that are actively traded on NSE, and is owned and managed by India Index Services and Products Ltd. (IISL), a subsidiary of NSE. Furthermore, the base value of the index is 1000, and it is computed using the free-float market capitalization weighted method.
Similar to Sensex, the market capitalization is first calculated by multiplying equity with market price. To determine the free-float capitalization, the equity capital is multiplied by the price, and it is once again multiplied with the IWF (Investible Weight Factor). Nifty is then calculated on a daily basis, by dividing the current market value by the base market capital, and is multiplied by the base index value of 1000.
Difference Between Sensex and Nifty
Sensex and Nifty are stock market indices, which are used to depict the strength of the stock market. While both are calculated almost in the same method, there are a few differences between the two market indices.
01. While Nifty is derived from ‘National Fifty’, Sensex is derived from ‘Sensitive Index’.
02. Sensex is operated by the Bombay Stock Exchange (BSE), while Nifty is operated by the India Index Services Products Ltd. (IISL), a subsidiary of National Stock Exchange (NSE).
03. Nifty consists of 50 selected stocks from the top 50 companies, which are used to determine the index, while Sensex consists of 30 selected stocks from the top 30 companies, which are used to determine the index.
04. The base index value of Nifty is 1000, while the base index value of Sensex is 100.
Factors That Affect the Performance of an Index
Sensex and Nifty are sensitive to the changes in the economy. When the economy is booming, it gets reflected in the superior performance of the stock market and the indices will be upward. Several macro-economic factors, therefore, influence the performance of indices.
Change in rate of interest: Interest rate and stock market move in the opposite direction. When the interest rate goes up in the economy, lending becomes costlier. To compensate this, companies reduce their expenses, which put pressure on stock performance. As a result, indices fall.
Inflation: Rising inflation depicts a situation when the value of money experiences a steep fall.
When inflation is high investors have little surplus funds to invest and companies also suffer because of overall rising cost in the economy. It causes the stock market to fall.
Global economy: Global economic and political ups and downs are also responsible for fluctuating Sensex and Nitfy. For example, recession in the global market will also impact the performance of Indian indices.
Nifty and Sensex are two of the major stock market indices in India. Both Nifty and Sensex depict the strength of the stock market, and have many similarities. However, the key difference between Sensex and Nifty is that Nifty is designed to measure the performance of 50 top companies, while Sensex has been designed to measure the performance of 30 well-established companies. Furthermore, the base value of the index for Sensex is 100, while the base index value of Nifty is 1000.
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