There are thousands of listed companies in India. And, it is not at all easy to track every single stock. So, a market index plays a very important role here. Therefore, a market index is calculated which acts as a representative of the whole market. Hence, Sensex and Nifty are the two important indicators which are used to measure the behavior of the market. These market indices are known as a standard for portfolio performance. SENSEX (Sensitive Index) and NIFTY (Net Index of Fifty) are the benchmark index of India.
Sensex, in simple words, is the combined value of stocks of 30 specific companies listed on Bombay stock exchange (BSE). BSE can revise this list of 30 over the time. So, if Sensex fluctuates, it shows on the economy as well. For example, if Sensex goes up people become more intrigued in buying stocks because they believe that economy is going to grow. But, if Sensex goes down, people tend to stop investing in economy.
Let us take it with the help of an example, it is like trying to determine the ‘intelligence’ of a class of 500+ students across various courses by taking the average marks of Top 30 students. Most of the time, the overall performance of the class can be determined by looking at the average of Top 30 students, but this may not necessarily be so. This does not mean comparing the average is anywhere wrong. In fact, it is even better to compare the averages across a period of time, or across classes as it is more helpful rather than looking at the average as a stand-alone factor.
NIFTY is abbreviated form for National Fifty. This is an index on fifty shares listed on the National Stock Exchange of India. It covers 50 stocks from different sectors of the Indian economy. So, this is commonly referred to as NIFTY 50 also. When you buy Nifty future, it means you have invested in 50 company’s shares which, collectively, are representing Nifty Index. It is basically automatic diversification of your investment in 50 stocks.
In simpler words, let us take it with the help of an example. It is just like the fuel indicator of your car. When the fuel Indicator is in the Red zone, you understand that your fuel tank is about to be empty and you need to refill it or else your car will stop running. In the same way, when you are filling up your tank and the Indicator turns full in Green zone, you understand your tank is full and you should stop filling it or else it will spill out of the tank. Likewise, Nifty Index constitutes of 50 companies which are considered to be the nation's economy movers and shakers. Each of the 50 company contributes some weightage to the Nifty Index and its fall and rise indicates the condition of our economy.
Imagine, there is a basket full of fruits- apples, bananas, oranges. The constituents of the basket- apples, bananas and oranges are traded in the markets every day and their prices are bound to fluctuate. So, their prices move up and down due to demand and supply imbalances. So, the value of the fruit basket is the sum of the weight of each constituent multiplied by its price.
Now, if instead, you had a basket of select US stocks, the value of the basket would be the weighted average of the value of all stocks. Hence, the rise and fall of an index would reflect the composite performance of all these companies, and in turn it is the representative of the whole market. It is the barometer of the economy.
Indices can be constructed to track the performance of stocks, bonds, currencies, volatility, prices amongst many other things.
Both, Sensex and Nifty are stock exchange indices that determines the performance of the stock market. In simple words, they are the clear indicators of the market movement. Hence, you get a clear idea whether most of the major stocks have gone up or down. Therefore, when Nifty and Sensex goes up, you see an instant cheerful wave in the stock market. You see a quick motion and excitement in stock trading activities, right! Moreover, increase in the market index directs towards the economic growth of the country.
Since, Nifty is more diversified and has additional stocks listed as compared to BSE Sensex, more trading is done on it. However, each of them targets the large-capitalization stocks and performances over the years have clad to be similar.
Now, that you have learnt the basics about what is Nifty and Sensex, you can better understand the stock market.