what are Sensex and Nifty
When you start investing in the stock market, you come across various terms and jargon that can seem overwhelming. Two of the most basic terms used are the BSE Sensex and Nifty. While a quick online search will tell you that these are stock market indices, in this article, we will attempt to decode them for you to help you gain a comprehensive understanding. Let’s begin with some basics.
What is a Stock Market Index?
Trading in the share market takes place on a stock exchange. You can buy and sell shares of companies that are listed with the exchange. Currently, there are around nine stock market exchanges in India, and companies can choose to list their shares with one or multiple exchanges.
In the share market, the price of a share is determined by its demand and supply. Investor sentiment towards the economy, sector and company plays a huge role in determining the price of a stock. Every exchange has hundreds of stocks listed. To assess the overall sentiment of investors, it is important to have a statistical measure that helps us understand the direction in which the average stock prices are moving. In other words, are most of the stocks experiencing a price rise or fall.
This is made possible by a share market index. It is a measure of the average performance of stocks as defined by the index. So, if there is an index that covers stocks of banking companies, then the index will offer an insight into the direction stock prices have taken compared to the previous day.
Also Read: What are Stock Market Indices?
What are Sensex and Nifty?
Two of the most popular exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The BSE has over 5000 listed companies, while the NSE has around 2000 companies. To assess the overall performance of stocks in these exchanges, two indices were formed:
- Sensex for BSE
- Nifty for NSE
What is Sensex?
The S&P BSE Sensex is also known as the Sensitive Index and is owned and managed by the BSE. It is the oldest share market index in India and reflects the performance of the BSE. It comprises the 30 most actively traded stocks listed on the BSE that cover around 12-13 sectors. If the BSE Sensex increases, then it means that the average price of the underlying 30 stocks has increased too and vice versa. Internationally, the BSE Sensex is traded on the EUREX exchange and the stock exchanges of BRICS countries
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BSE Sensex Calculation
First, the market capitalization of all of the 30 companies is calculated. This is converted into free-float market capitalization by multiplying it with a free-float factor. Lastly, the free-float market capitalization is divided by the index divisor (100) to arrive at the value of the Sensex.
The base year of the Sensex is 1978-79, and the base value is 100. This means that in 1979, the Sensex was at 100 points. If in 1980, it increased to 125 points, then the returns offered by the index were 25%. Currently, the Sensex is at 59,000 points. This means that in around 43 years, it has offered a CAGR return of around 16%.
What is Nifty?
The Nifty 50 is also known as the National Fifty Index and is owned by a subsidiary of NSE called IISL (Index and Services and Products Limited). It reflects the performance of the National Stock Exchange or NSE. Nifty comprises the 50 most actively traded stocks on the NSE that cover around 24 sectors. Internationally, Nifty is traded on the Singapore Stock Exchange and the Chicago Mercantile Exchange.
Nifty is calculated by dividing the current market value by the base market capital and multiplying the result by 1000.
The base year of Nifty is 1995, and the base value is 1000. Currently, the Nifty is at 17,600 points. The CAGR returns offered by Nifty in nearly 26 years are around 11.66%.
Also Read: What is Nifty Index Fund & How to invest In It?
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Difference Between Nifty and Sensex
Sensex and Nifty are two words that have become synonymous with stock markets in India. Even people who are not active stock investors are aware of Sensex and Nifty as stock market indices.
Frequently Asked Questions
Sensex offers a measure of the performance of the BSE, and Nifty provides an overview of the performance of the NSE. As a share market investor, this can help you assess the overall investor sentiment and make investment decisions accordingly. They can also help you compare the performance of your stocks or mutual funds by assessing if they have performed on par with the market or exceeded them.
There are two simple ways of investing in indices like the Sensex and Nifty:
- You can buy stocks in the same weightage as in the index.
- You can invest in Index Mutual Funds.
To invest directly, you would need a sizeable corpus as most of the stocks included in these indices belong to the top-performing companies from various sectors and have high market prices. If you have a smaller corpus, then an Index Mutual Fund can be a good option.