Difference Between Nifty And Sensex

The Bombay Stock Exchange and the National Stock Exchange are the two stock exchanges in India. To gauge the state of the market, every stock exchange must have an index.

The Bombay Stock Exchange's (BSE) index is called Sensex, and the National Stock Exchange's (NSE) index is called Nifty.

What Is Index?

Market specialists cannot calculate the performance of each listed stock to ascertain the market trend. Since thousands of stocks are listed, that would take a long time and be impossible since, by the time the calculation is finished, the market patterns will have changed.

How Can Anyone Decide on The Spur of The Moment?

An index selects a representative sample of listed businesses within each of its industries. It's like picking out a few apples from the basket rather than the entire store; it would tell you if the apples are of high quality or not. The companies that make up this sample of listed corporations are referred to as index components, and the sample itself is termed the Index.

Stocks in the Index are selected from all of the key industries, not just one particular industry. In this manner, rather than focusing on a particular stock market industry, we are examining the big picture when the performance is assessed and presented.

What is Sensex?

The Bombay Stock Exchange's (BSE) stock market index is called Sensex, sometimes known as the Sensitive Index. Sensex, a market-weighted stock index with a base value of 100, comprises shares of the top 30 established companies selected based on their financial soundness and performance. Additionally, the free-float market capitalization approach is used to generate Sensex, and the index's level directly reflects the performance of the 30 chosen stocks.

Free-float market capitalization is the percentage of all shares issued by businesses that are easily traded by the general public on the market. The index in the free-float market capitalization approach represents the market value of each of the 30 chosen equities in relation to a base period. The free-float market capitalization is obtained by multiplying the market capitalization of each of the 30 firms by the free-float factor, which is the first step in calculating the Sensex. After that, the Index Divisor divides it.

How To Calculate Sensex?

The free-float capitalization of each of the 30 companies and its base value are used to compute the Sensex. Here are the stages involved in calculating Sensex:

1. Determine the thirty companies' market capitalization.
2. To determine the total free-float capitalization value, compute the free-float capitalization of each company and add it together.
3. Think about the index's base value, which is 100.

After obtaining the numbers, the following formula is used to calculate the Sensex:

Sensex is calculated as follows: * Base value of the Index = (Free float market capitalization of 30 businesses / Base market capitalization).

What is Nifty?

The National Stock Exchange (NSE) uses the National Stock Exchange Fifty (Nifty) as its stock market index. It consists of 50 actively traded companies on the NSE and is owned and administered by India Index Services and Products Ltd. (IISL), an NSE subsidiary.. It is also referred to as NIFTY 50 and CNX Nifty. In addition, the index has a base value of 1000 and is calculated using the weighted free-float market capitalization technique.

The market capitalization is first determined by multiplying equity by the market price, much like with the Sensex. The equity capital is multiplied by the price and then by the IWF (Investible Weight Factor) twice to get the free-float capitalization. Next, Nifty is computed daily by multiplying the base index value of 1000 by the current market value divided by the base market capital.

How to Calculate Nifty?

A free-float market capitalization-weighted approach is used to determine the Nifty. The index's level represents the combined market value of all the stocks that make up the index over a given period. It's critical to comprehend concepts like "float-adjusted" and "market capitalization" in order to comprehend this fully.

• Market capitalization represents the total value of a company's shares owned by the corporation and its investors.
• Shares owned by some investors, like trusts, the government, and private organizations like promoters, are not included in the free-float market capitalization.
• Index Value is now calculated using the following formula: Index Value = Current Market Value / (1000 * Base Market Cap).

In this case,

The total market capitalization of all 50 companies, weighted according to their respective positions, is represented by the current market value.

The total market capitalization of all 50 companies during the base period is referred to as the base market cap.

Factors Affecting the Calculation of NIFTY And Sensex

The following variables may have an impact on how both indexes are calculated:

1. Market Capitalization: Since both indices are weighted by market capitalization, companies with higher market capitalizations have a bigger influence on the index.
2. Price Movements: Changes in the prices of certain stocks may also impact the performance of the indices as a whole.
3. Modifications to the Constituent Stocks: Both indexes are examined regularly, and the constituents are changed based on various factors.
4. The individual stocks that comprise the stock market index are liable to variations in the index itself.
5. Corporate Actions: Corporate actions, such as stock splits, mergers and acquisitions, and bonus issues, may also impact the indexes' computation.
6. Economic and Political Events: Events in the domestic and international arenas may impact the stock market and, consequently, how the indexes are calculated.
7. Sensex VS NIFTY Returns: Performance Analysis

A Comparison Between the NIFTY And Sensex's Historical Performance

The Indian stock market's two most well-known indices - NIFTY and Sensex are utilized as benchmarks to assess the overall performance of the market. Although the two indices share many attributes, there are some distinctions in their composition and methods of weighting.

In terms of returns over time, Nifty has beaten Sensex. Take the five-year Nifty sector-wise performance from 2016 to 2021, for example. The compound annual growth rate (CAGR) for NIFTY was approximately 12.5%, while the CAGR for Sensex was approximately 11.5%. Similarly, NIFTY yielded a CAGR of almost 11% for the ten years from 2011 to 2021, while Sensex yielded a CAGR of about 10%.

It's crucial to remember that previous performance does not guarantee future outcomes, and both indices could have distinct future performances. Not to add to the good long-term trend that NIFTY and Sensex have demonstrated. There have been times of fluctuation and volatility, which may affect the returns. Therefore, before investing in the market, investors should conduct due investigation and not depend just on past performance.

Examination Of the NIFTY And Sensex's Sector-Specific Performance

Stock market indices that monitor the performance of various companies listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the NIFTY and Sensex, respectively. This is a comparison of their performance by sector:

Banking: The NIFTY and Sensex both place a large emphasis on the banking industry. However, public sector banks predominate in the Sensex, while private sector banks have a larger weighting in the NIFTY.

Information Technology: The NIFTY's IT sector is weighted higher than the Sensex's. This is because the NIFTY includes significant IT firms like Infosys, TCS, and Wipro.

Vehicles: The Sensex has a larger weighting in the auto sector than the NIFTY. This is because the Sensex includes significant automakers, including Maruti Suzuki, Mahindra & Mahindra, and Tata Motors.

Oil and Gas: The Sensex has a larger weighting in the oil and gas industry than the NIFTY. This is because significant oil and gas firms like Reliance Industries and Oil & Natural Gas Corporation are included in the Sensex.

Pharmaceuticals: The NIFTY has a larger weighting in the pharmaceuticals sector than the Sensex. This is because the NIFTY includes significant pharmaceutical companies, including Sun Pharma, Cipla, and Dr. Reddy's Laboratories.

NIFTY vs Sensex: Impact of Global Economic Events

Events in the world economy have a big effect on how well NIFTY and Sensex perform. The Indian stock market is impacted by and does not operate in a vacuum from the global economy.

For example, the Indian stock market was significantly impacted by the global financial crisis of 2008. The ripple impact of the crisis caused a significant decrease in both the NIFTY and Sensex during that time. Similarly to this, the performance of both indices has been significantly impacted by events like the Covid-19 pandemic and the US-China trade war.

When developments in the world economy create uncertainty or instability, investors often become risk-averse and may sell their stock market holdings, causing the indices to decrease. Conversely, favorable judgments or occurrences in the world economy could increase investor confidence, causing the indexes to rise as well.

Composition of NIFTY and Sensex

Based on the market capitalization of the firms listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), respectively, the benchmark indices are constructed.

As of May 2023, Nifty has 50 companies chosen based on various criteria, including market capitalization and liquidity. ICICI Bank, TCS, HDFC Bank, Infosys, and Reliance Industries are a few of the significant businesses that are part of the Nifty.

In contrast, the 30 companies that make up the Sensex were chosen based on a number of criteria, including market capitalization. Reliance Industries, HDFC Bank, HDFC Ltd, Infosys, and Tata Consultancy Services are a few of the significant businesses that are part of the Sensex index.

Both indices' composition is examined regularly to ensure that they continue to indicate the market's performance as a whole. Businesses may be added to or subtracted from the indices in response to modifications in their market capitalization or other variables.

Major Factors That Affect the Performance of Indices

The status of the nation's economy is frequently reflected in the stock market. The market frequently experiences some sluggishness during an economic downturn. Some of the variables influencing the indices' performance are as follows:

1. Rate of Interest
   Interest rate fluctuations cause ups and downs in the stock market index. For instance, when the government raises interest rates, businesses' costs of borrowing rise. Consequently, businesses try to reduce costs, which can be detrimental to the company's earnings and share price.
2. Rate of Inflation
   There is an effect of inflation on stock market indices as well. People need more money to invest, for instance, during periods of excessive inflation. Decreasing the power to invest as a result. Companies are also affected by it. The corporation passes on to its clients its higher input expenses. These affect the company's earnings and have a direct effect on sales. Consequently, the share prices are also impacted.
   
3. International Trade
   A downturn in the world economy has an impact on the equities markets. In addition, other variables that affect the performance of the stock market include crude oil prices, political unpredictability, and fluctuations in currency exchange rates (rupee movements).

Stock Market Indices Types

An index of the stock market does not simply reflect the market as a whole. As a matter of fact, certain sectors are represented by certain sector-based indices. Additionally, there are indices based on market capitalization that show businesses with a given market capitalization. The various varieties of market indices are as follows:

1. Index of Benchmarks
   A benchmark index is a general representation of the stock market. It facilitates the analysis and comprehension of market trends. It serves as a standard by which to compare how well different investment portfolios perform. The Nifty 50 and BSE Sensex are the benchmark indices in India.
2. Index of The Broad Market
   A benchmark index is similar to a broad market index, but it includes a greater number of stocks. For instance, the BSE Sensex includes 30 stable, financially managed corporations. Yet, the BSE 100 is a broad market index because it includes the top 100 companies.
3. The Index of Market Capitalization
   A market capitalization index, such as the BSE Small Cap and Nifty Midcap, focuses on a specific market capitalization and represents all companies within that market capitalization.
4. A Sector- Or Industry-Based Index
   Sector-based indices provide a broad representation of an industry. Companies within a single industry will be present, such as Nifty Pharma, Nifty FMCG, and Nifty Auto, among others.

Significance Of a Stock Market Index

The share market indices Nifty and Sensex show the performance of the stock market. These indices allow anyone to research and examine stock market trends.

1. Aids in Selecting Stocks
   There are thousands of enterprises on the exchange. Examining every stock before settling on a few picks is challenging for an investor. As a result, it might be challenging to distinguish between two equities in the absence of a benchmark index. Stock market indices are useful in these kinds of situations. Moreover, an index divides the equities according to factors like size, financial effect, industry, etc. Investors can, therefore, focus their search for company analysis by comparing the firms that comprise an index.
2. Beneficial for Novices
   Due to stock markets' extreme volatility, investors should exercise extreme caution at all times. Since novices lack knowledge of market dynamics, market indices serve as a useful point of reference for comprehending and evaluating the stock market's performance. Index tracking and investing are options for novice investors who are handling their investments without the assistance of a financial advisor.
3. Represents the Opinions of Investors
   Changes in stock market indexes allow people to analyze investor mood. For instance, specific corporate or reform announcements put pressure on particular stocks. Put another way, some investors purchase or sell stock based on their perception that such news may influence a company. To calculate the influence of any trend, it is crucial to examine the underlying sentiment.
4. The Option of Passive Investing
   Purchasing an index fund is a quick way to invest in the top stocks. This is passive investing. Before making a single investment in each stock, the investor can conduct a simple study or analysis of equities. They can invest in an index fund that replicates the benchmark index with just one click.

Difference Between Nifty and Sensex

Conclusion

Two of the most important stock market indicators in India are the Sensex and Nifty. Nifty and Sensex share many similarities, and both show how strong the stock market is. However, the main distinction between Sensex and Nifty is that the former is intended to gauge the performance of 50 leading corporations. In contrast, the latter is meant to gauge the performance of 30 reputable companies. Additionally, the Nifty index has a base value of 1000, whereas the Sensex index has a base value of 100.