What is Nifty and Sensex in Stock Market?

Many a time we come across headlines like, "Sensex slips 210 pts amid weak global cues; financials drag" Or "Nifty tests 9,300; RIL, HDFC, ICICI Bank top drags" and have often wondered who or what is Nifty and Sensex. Today we shall get a better understanding of what we are referring to when we discuss Nifty and Sensex.

The stalwarts of the Indian Stock Exchange are the NSE (National Stock Exchange of India Limited) and the BSE(Bombay Stock Exchange). The NSE is the leading electronic stock exchange in India and the 11th largest Stock Exchange in the world. The NSE was incorporated in 1992  and was recognized as a stock exchange in 1993, to establish transparency in the market.

It pioneered in providing a modern, fully automated screen-based electronic trading system that offers an accessible platform for trading of investors spread across the country. The BSE is the oldest Stock Exchange in Asia and was established in 1875. The BSE is the world's 10th largest stock exchange, with an overall market capitalization of more than $1.51 trillion as of March 2020. On August 31, 1957, the BSE was the first stock exchange recognized by the Indian Government under the Securities Contracts Regulation Act. Most of India's stock trading happens through NSE and BSE. There are other stock exchanges as well, like the Calcutta stock exchange, but they are not that popular.

Before we delve into understanding Nifty and Sensex let us understand what an Index indicates.

What is an Index?

A stock market index is a statistical measure that depicts the stock market's trajectory. It is created based on a hypothetical portfolio of securities representing a particular market or a segment. The criteria of stock selection may vary according to the type of industry, market capitalization, or the size of the company. The value of the stock market index is computed using the values of the underlying stocks. Any price changes that take place for the underlying stocks would impact the overall value of the Index. If the prices of most of the underlying securities rise, then the Index will rise and vice-versa.

In this way, a stock index reflects overall market sentiment and direction of price movements of products in the financial, commodities, or any other markets.

What is Nifty?

NIFTY is the flagship market index introduced by the National Stock Exchange. It is a combination of  – National Stock Exchange and Fifty coined by NSE on April 21, 1996. NIFTY 50 is a benchmark based index which showcases the top 50 stocks that are traded in the stock exchange out of a total of 1600 companies listed on the NSE. 

These 50 stocks represent 12 different sectors of the Indian economy. It comprises stocks of core sectors like financial services, consumer goods, information technology, entertainment and media, pharmaceuticals, telecommunications, metals, cement and its products, automobiles, pesticides and fertilizers, energy, and other services. In simple terms, it implies that every time we see NIFTY increasing by this many points, it indicates that all the heavyweight stocks of NSE across all sectors are moving up. This stock index is used extensively by investors in India and worldwide as a barometer of the Indian capital markets

NIFTY comprises a host of indices like NIFTY 50, NIFTY IT, NIFTY Bank, and NIFTY Next 50; and is a part of the Futures and Options (F&O) segment of NSE which deals in derivatives.

Parameters for NIFTY Index Listing

For a company to be listed on the NIFTY Index it needs to fulfill the below-listed criteria 

• The company must be registered with the National Stock Exchange. It will also include companies that are not listed on its platform but are permitted to trade

• Stocks should have high liquidity.

• The company needs to have a trading frequency of 100% for the last six months.

• It should have an average free-floating market capitalization, which is 1.5 times higher than the smallest index constituent. 

• Shares that have Differential Voting Rights are also eligible for the Index.

The NIFTY Index is reconstituted every six months based on the stock performance for the preceding six months. In such a case, the revamped list may eliminate or add new stocks as the case may be. For every change, the companies are informed through a notification four weeks prior to reconstitution. Apart from this, a quarterly review of the included companies is done to check their adherence to portfolio concentration regulations for Index Funds and ETFs as per SEBI guidelines.

How is Nifty calculated?

NIFTY is computed based on the free-float market capitalization-weighted method, where the level of the Index reflects the total market value of the stocks relative to a particular base period.

Market Capitalization = Shares Outstanding x Price

Free Float Market Capitalization = Shares Outstanding x Price x Investible Weight Factor

Index Value = Current Market Value / Base Market Capital x Base Index Value (1000)

4 main factors are to be taken into account when calculating the NIFTY:

• The base year is taken as 1995

• The base value is set to 1000

• NIFTY is based on 50 actively traded stocks of the NSE.

• 50 top stocks from selected from 24 sectors

Top Companies Listed under NIFTY

The following table demonstrates the list of companies under NIFTY 50, the sector they represent, and the weightage as of June 29, 2020.

What is Sensex? 

The Sensex, also known as the S&P BSE Sensitive Index, is the BSE's benchmark index. It is a free-float market-weighted stock market index of 30 well-established and financially sound companies that are listed on the Bombay Stock Exchange. 

The Index's composition is reviewed semi-annually in June and December. Initially compiled in 1986, the Sensex is the oldest stock index in India. Analysts and investors use the Sensex to perceive the overall growth and development of the Indian economy.

The term Sensex was coined by stock market analyst Deepak Mohoni and comprises Sensitive and Index.  

Eligibility Criteria for getting listed on the BSE Index

The constituents of the Index are selected by the S&P BSE index Committee based on these criteria:

• The company should be listed in India on BSE.

• Its market capitalization should be a large-to mega-cap .

• High on liquidity, generating revenue from core activities.

• It should keep the sector balanced broadly in line with the Indian equity market. 

How is the Sensex Computed?

Sensex is calculated using the "Free-float Market Capitalization" methodology.  Under this method, the level of Index at any point of time will reflect the Free-float market value of 30 component stocks relative to a base period. 

Free Float Market Capitalization = Price of its stock  x  the number of shares issued by the company x Free-float factor 

The base period of Sensex is 1978-79, and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.

During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real-time.

Companies Listed under Sensex 

Weightage of companies in the Sensex 30 as of June 2020

How does Nifty differ from the Sensex?

Both Nifty and Sensex are indices of the stock market that indicate the market's strength as they target large-cap stocks. The Nifty reflects the value of the National Stock Exchange (NSE), whereas Sensex is the stock market index for the Bombay Stock Exchange (BSE).

Nifty spans a wider index as it comprises more listed securities, i.e. 50 stocks, whereas Sensex is 30 stocks. In the case of Nifty, the portfolio is more diversified as compared to Sensex. The trading volumes are also higher on the NSE in comparison to the BSE. However, the main difference between the two indexes is that the NIFTY value is lower than that of the Sensex. This is because in the case of Sensex, the base year is 1978-79, and the base value is 100, whereas in the case of the Nifty, the base year is 1995, and the base value is 1000. Nifty was started approximately 17 years from the base year of Sensex. If one takes the same base year for both the indices, one would get a similar value.