What are Sensex and Nifty? Detail Explanation

What are Sensex and Nifty?

To understand what is Sensex and Nifty, we first need to understand the Indian stock exchanges.

Let’s discuss India’s two major stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), along with their indexes.

The stock exchange is a market where a deal is made between the shares’ buyers and sellers. Sensex is the Bombay Stock Exchange’s main index, while Nifty is the National Stock Exchange’s main index. The index was created to keep transparency in the market. The index is significant for benchmarking.

There are about 5439 companies listed on the BSE and about 1952 companies listed on the NSE. And it isn’t easy to track these companies to know the market’s condition, and that’s why the index has been formed.

We don’t need to track all the companies in India to know a few companies’ situations. Only by observing Sensex and Nifty we can figure out whether the market is up or down. When the Sensex or Nifty is up, i.e., if they are green in colour, then we say that the stock market is up, while when the Sensex or Nifty appears in red, we say that the stock market is down.

Bombay Stock Exchange (BSE)

Bombay Stock Exchange (BSE), established in 1875, is the Indian Stock Exchange located in Dalal Street Mumbai, Maharashtra. BSE is Asia’s oldest and the world’s 7^th largest stock exchange, with an overall market capitalisation of US$2.8 trillion as of February 2021.

Sensex

The word ‘Sensex‘ was created by combining the words ‘Sensitive‘ and ‘Index‘ i.e., by taking ‘Sens‘ from Sensitive and ‘ex‘ from index. Sensex consists of 30 well-established companies from different sectors having excellent track records. This means that Sensex’s movement is entirely dependent on the share price movements of these 30 companies.

If Sensex went up, it means that most of the stocks in BSE in India went up during that period. If the Sensex goes down, the stock price of most of the major stocks of BSE has gone down.

Sensex was launched to understand the market movements. It shows the correct movement of the market. Sensex was started in 1986 with the base year as 1978-79 and the base value as 100 on April 01, 1979. 30 companies are selected based on free-float market capitalisation. These are different companies from different sectors representing a sample of large, liquid and representative companies.

Eligibility Criteria for Selection of Stocks

Market Capitalisation– The stock should figure in the top 100 companies listed by full market capitalisation.

Market Capitalisation Weightage– The weightage of each stock in Sensex based on six months average free-float market capitalisation should be at least 0.5% of the index.

Average Daily Trades– The stock should be among the top 150 companies listed by the average no. of trades per day for the last year.

Trading Frequency– The stock should have traded on each trading day for the last year.

Computation of Sensex

Sensex was initially computed based on Full Market Capitalisation methodology and was shifted to Free-float Market Capitalisation methodology with effect from September 01, 2003. Sensex is the free-float market capitalisation weighted average of 30 companies available under Sensex. The free-float market capitalisation is determined by multiplying the stock price by the free-float shares of the company. Free-float shares are evaluated by subtracting the shares held by promoters from the total shares of the company.

Sector Representation of Sensex

As of April 01, 2021

Source: https://www.bseindia.com/sensex

National Stock Exchange (NSE)

National Stock Exchange, established in 1992, is a leading stock exchange in India located in Mumbai, Maharashtra. It is the first dematerialised electronic exchange in India with a market capitalisation of over US$2.27 trillion, making it the world’s 11^th largest Stock Exchange as of April 2018. This is India’s first stock exchange where a modern, fully automated screen-based electronic trading system was provided to ease the trading facilities.

Nifty

The word ‘Nifty’ is formed combining the words ‘National’ and ‘Fifty’. Nifty consists of 50 well-established companies from different sectors having excellent track records. This means that Nifty’s movement is quite dependent on the share price movement of these 50 companies. NIFTY 50 Index is calculated using the free-float market capitalisation method, i.e., Nifty is the Free-float market capitalisation weighted average of 50 companies present under Nifty.

NIFTY 50 can be used for various purposes such as benchmarking fund portfolios, launching index funds, ETFs and structured products.

Nifty was launched on April 22, 1996, with the base date taken as November 03, 1995, and the base value 1000.

Eligibility Criteria for Selection of Stocks

Domicile of the company– The company must be domiciled in India, listed and traded on the NSE.

Eligible Securities– Companies that are allowed to trade in the F&O segment are only eligible to be constituent of the index.

Liquidity– Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when trading an index. For a possible inclusion into the NIFTY50, a stock should have traded at an average impact cost of 0.50% or less than that during the last 06 months for 90% of the observations, for a portfolio size of Rs. 10 crores.

Float-Adjusted Market Capitalisation– Companies will be eligible for inclusion in the index provided that the average free-float market capitalisation is at least 1.5x the average free-float market capitalisation of the smallest constituent in the index.

Listing History– The company should have a listing history of 6 months.

Other Variables– A company that comes out with an Initial Public Offering (IPO) will be eligible for inclusion in the Nifty50 if it fulfils the normal eligibility criteria for the index for 3 months period instead of 6 months.

Trading Frequency– The company’s stocks should have traded on each trading day for the last six months.

Sector Representation of Nifty

As of March 31, 2021

Source: https://www1.nseindia.com/content/indices/ind_nifty50.pdf

When Sensex/Nifty increases, it shows economic growth in the country. For example, during the Indian recession of 2008-2009, the Sensex fall over 12,000 points that are around 60%. The fall in the Sensex was analogous with the recession, meaning people were selling the shares and the country’s economic condition was not that good.

The stock exchanges have different other indices as well. The NSE & BSE has almost all indices present. In sectoral indices, the well-established companies of a particular sector are present. If you want to track just the banking sector & see how it is performing, you can check the indices such as BANKEX at BSE or BANK NIFTY at NSE.

On the stock exchange, the small-cap and mid-cap companies have separate indices such as S&P BSE Small-Cap, S&P BSE Mid-Cap, Nifty Mid-Cap Fifty, etc. Nifty, Sensex and other indices are used as Benchmarks also. It means that you can figure out through Nifty and Sensex that whether your investment has provided you better returns or not.

For example, in 2020, Nifty provided a return of 14.17%, which means Nifty rose by 14.17% in 2020. Sensex in 2020 provided a 15.75% return which means that Sensex in 2020 rose by 15.75%. If your investments give you more returns than this, you can say that your returns on investments were amazing. And if your investments provided you with a lesser return, then you can say that your returns on investments weren’t good.

Similarly, if you invest in a banking stock, you can compare your returns at BANKEX on BSE & BANK NIFTY on NSE. If you have invested in Mid-Cap stocks, then you can compare your mid-cap returns with mid-cap indices.

If the stock available in Sensex or Nifty is continuously performing bad, then the stock exchange can replace it with well-established and consistently good performing stock. This decision is solely made by the stock exchanges. For instance, in 2020, NSE replaced Divi’s Laboratories and SBI Life Insurance with Bharti Infratel and Zee Entertainment Enterprises. This way, you discover the current situation of Stock Market India through Nifty & Sensex.

Similarly, you can know foreign countries’ stock market conditions by viewing major indices of stock exchanges. For example, if you like to know the US’s stock market situation, you can view NASDAQ, Index of US Markets.

Index Re-Balancing

Nifty is re-balanced on a half-yearly basis. The cut-off date is January 31 and July 31 of each year, i.e., For a half-yearly review of indexes, average data for 06 months ending the cut-off date is considered. 04 weeks prior notice is given to the market from the date of the change.

Sensex is re-balanced on a quarterly basis. Banking and financial services companies are higher in the index.

In this way, the companies are selected, and it changes from time to time. If the Indexes go up, it is considered a symbol of economic growth.