What is Sensex and Nifty [Difference] & how they are calculated?

I’m sure you’re a normal human being and haven’t climbed out from under a rock or landed onto our humble planet from a galaxy far far away.

So, I’m not going to ask you whether you’ve ever heard the terms Nifty or Sensex.

If you’ve ever picked up a newspaper you must have spotted these words somewhere on the first page.

What is Sensex and Nifty

So, the real question is, what is Nifty and Sensex and what is the difference between them?

Any guesses?

It’s very easy, really.

The Nifty and Sensex are indices of the National Stock Exchange and the Bombay Stock Exchange respectively. The Nifty represents 50 companies from different sectors while the Sensex represents 30 of the forerunners of the Bombay Stock Exchange.

Now, what is the point of such indices?

I’m glad you asked.

It is not possible to track all the companies listed on the stock exchange just to know the condition of the stock market. Hence indices are made to see easy picture across the market.

When Sensex or Nifty goes up, we say that market is good today. When it goes down, we say market is not good today.

A market index is simply a convenient summary of market prices. It helps understand how well the market is performing as compared to previous periods. The movement of the index is determined by the performance of the underlying stocks. If the stock prices fall, the index falls too. Similarly, the index rises if the underlying stocks perform well.

It’s really just a rough measure and easy method of seeing how the market is performing. So, market indices really are very very important.

Let me tell you a little bit about Sensex first.

What is Sensex?

Sensex stands for SENSitive index (first four letters stand for sensitive and last two letters stand for index). We can say that “Sensitive Index” is the long form of Sensex.

More than 5000 companies are listed on the BSE, out of which only 30 companies are present in Sensex.

As I just mentioned, the Sensex is an index consisting of 30 stocks and it calculate the performance of these 30 companies on a real time basis.

The Sensex is actually calculated every 15 seconds and the value of the index is made available in real time.

Yes, really.

15 SECONDS.

That’s got to be hard to top, right?

Anyway, let’s get back to the point.

The Sensex was calculated for the first time in 1986. It is used by several investment firms and funds for benchmarking. It represents almost all the sectors well through representative companies.

Here’s a sector wise composition of sensex. (as of dec 2012)

sector composition of Sensex

Check the fact sheet of Sensex to know more about it.

Companies in Sensex

Here is the list of the companies included in the Sensex (as of January 2017):
  1. Adani Port
  2. Asian Paint
  3. Axis Bank
  4. Bajaj Auto
  5. Bharti Airtel
  6. CIPLA
  7. Coal India
  8. Dr. Reddy’s Lab
  9. GAIL
  10. HDFC
  11. HDFC Bank
  12. Hero MotoCorp
  13. Hindustan Unilever (HUL)
  14. ICICI Bank
  15. Infosys (Infy)
  16. Indian Tobacco company (ITC)
  17. Larsen & Toubro (L&T)
  18. LUPIN
  19. Mahindra & Mahindra (M&M)
  20. Maruti Ltd.
  21. NTPC
  22. ONGC
  23. Power Grid
  24. Reliance Industries (RIL)
  25. State Bank of India (SBI)
  26. Sun Pharma
  27. Tata Motors
  28. Tata steel
  29. Tata Consultancy Services (TCS)
  30. Wipro

Next obvious question.

How is the Sensex calculated?

The method adopted for calculating the Sensex is the “free float market capitalization weighted average” method.

Under the free float market capitalization method, only the number of stocks available readily for trade are considered. This does not include those held by promoters or management.

To calculate the index value, the market capitalization of the constituent companies is multiplied by the “free float factor”, which makes it adjustable for the float equity. The value is then divided by a factor called “Index Divisor”. The index divisor links the base value of the Sensex with the current value. The base value of the Sensex is taken as 100 and the base year is taken as 1978-79.

Is this getting a bit too technical?

Let me give you an example.

Suppose the index consists of only two stocks, stock A and stock B.

Suppose Company A has 1000 shares in total, out of which 200 are held by promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the “free floating” shares.

Company B has 2000 shares in total, out of which 1000 are held by promoters and the remaining 1000 are free floating.

Watch this video to understand the concept of market capitalization:

What is market capitalization?

Now let’s take the story forward and assume that the market price of stock A is currently Rs. 120. The “total market capitalization” of A is thus Rs. 120,000 (120x 1000) and the “free float” market capitalization is Rs. 96,000 (120x 800).

Note: Formula of market capitalization is: No. of shares x Price of a share

Similarly, for B, the current market stock price is Rs, 200. The total market capitalization of company B is Rs. 400,000 (200 x 2000) and the free float market capitalization is Rs. 200,000 (200 x 1000).

Therefore, as of today, the total market capitalization of the index is Rs. 520,000 (120,000+400,000) and the free float market capitalization of the index is Rs. 296,000 (96,000+200,000).

The year 1978-79 is considered the base year of the index with a value set to 100. This means that at that time, the market capitalization of the stocks was, for example, 60,000, but we assumed it to be equal to an index value of 100.

Therefore, the present index value is 296,000 x 100/60,000=493.33

The factor 100/60,000 is called the index divisor.

Of course, the actual calculation of the index is slightly larger and more complicated than this much much watered down example. But the basic mechanism holds.

This is how the Sensex is calculated.

The movement of the index depends on the demand and supply forces for the various constituent companies. The closing value of the index is calculated by the weighted average of all the trades in the individual scripts during the

Now let’s talk about the Nifty.

What is Nifty?

Just like the Sensex was introduced by the Bombay Stock Exchange, Nifty is a major stock index in India introduced by the National Stock Exchange.

Nifty comes from an amalgamation of the words ‘National’ and ‘fifty’.

You must have thought nifty came from the English dictionary, right?

Well, now you know better.

Nifty is owned and managed by India Index Services and Products (IISL), which is a wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. It has shaped up as one of the largest single financial products in India, comprising of exchange traded funds, exchange traded futures and options, other index funds and OTC derivatives.

The Nifty 50 covers 22 sectors of the Indian economy and offers investment managers exposure to the Indian market in one portfolio.

The Nifty 50 index is a free float market capitalization index. It was initially calculated on full market capitalization, but later changed to the free float methodology.

Here are Nifty’s top constituents and its sector representation. (as of December 2016)

Top constituents of Nifty

sector representation of Nifty (weightage)

Source: NSE

The method of calculation of the Nifty is very similar to that of the Sensex, but with three basic differences.

  • The base year is taken as 1995
  • The base value is set to 1000
  • The number of stocks taken is 50

So, as you can see, it’s really very similar to the Sensex.

If you’re interested in the companies included in the Nifty 50, I’ve provided a list below. (as of January 2017)

Companies in Nifty:

  1. ACC
  2. Adani Ports & SEZ
  3. Ambuja Cements
  4. Asian Paints
  5. Axis Bank
  6. Bajaj Auto
  7. Bank of Baroda
  8. BHEL
  9. Bharat Petroleum Corporation
  10. Bharti Airtel
  11. Bosch
  12. Cairn India
  13. Cipla
  14. Coal India
  15. Dr. Reddy’s laboratories
  16. GAIL
  17. Grasim Industries
  18. HCL
  19. HDFC
  20. Hero Motocorp
  21. Hindalco Industries
  22. Hindustan Unilever
  23. HDFC
  24. ICICI
  25. ITC
  26. Idea Cellular
  27. IndusInd Bank
  28. Infosys
  29. Kotak Mahindra Bank
  30. Larsen & Toubro
  31. Lupin
  32. Mahindra & Mahindra
  33. Maruti Suzuki
  34. NTPC
  35. ONGC
  36. PowerGrid Corporation of India
  37. Punjab National Bank
  38. Reliance Industries
  39. State Bank of India
  40. Sun Pharmaceuticals
  41. TCS
  42. Tata Motors
  43. Tata Power
  44. Tata Steel
  45. Tech Mahindra
  46. UltraTech Cement
  47. Vedanta
  48. Wipro
  49. Yes Bank
  50. Zee Entertainment Enterprises

You must be wondering why I’ve been spending all this time talking about the Sensex and Nifty.

I mean, there’s got to be a point to the meaningless babble, right?

Right.

If you’re planning to invest in the stock market, what’s the first thing you need to find out?

The present condition of the stock market, right?

Yes, that is right.

But how does one find out the condition of the stock market?

By following the trend of the different stocks from the different sectors.

Now, instead of following all the individual stocks and basically confusing yourself, all you need to look at is the Sensex and Nifty to get a glance at how the stock market is doing.

For instance,

Nifty has given 5.88% return in 2013 & 31.43% return in 2014.

Let’s assume that, your investment in stocks has given 15% return in 2013 & 18% in 2014.

So you can conclude that, in 2013, your investment was fairer than market, hence it can be considered as good investment. In 2014, your investment return was 13.41% lesser than NIFTY return, hence it can be concluded as poor investment. Investors and traders track the performance of the indices & compare their own returns with the indices to check the performance of their investments. In this way indices are used for benchmarking.

You can learn more about Sensex and Nifty here (in Hindi)

There are many other indices in addition to the very popular Sensex & Nifty.

BSE & NSE both have sectoral indices.

Here is a list of NIFTY’s key indices.

NIFTY’s key indices

Source: NSE

You can learn about the basics of the stock market here:

Conclusion:

Investors decide what to buy and where to invest their money by following the forever rising and falling trends of the market indices.

So, if you’re planning on investing, the Sensex and Nifty will be your new best friends.

If you have any questions or want to express your opinions, feel free to write a comment.

Happy investing! See you soon in a next post.



2 Comments

  • subham kumar

    Hello, in the above line you wrote that, nifty has given the 5.88% return in 2013, and 31.43% return in 2014, you can describe, how they calculate the return value in % and what do you mean by return in the case of nifty and sensex…

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