A stock exchange is an avenue that facilitates the transaction of shares/stocks between the buyers and sellers. The stock market operates because investors buy shares (making them part owners) in publicly traded companies and then sell them back (relinquishing their part ownership).

Many people invest in India because it has been performing well under all circumstances. The sentiment is that investors are buying and selling stocks according to their ideas and emotions.

You can easily trade your shares and gain potential profits with the stock market indices. These are just a couple of reasons why Indian stocks perform well under the prevailing economic conditions.

In India, the Bombay stock exchange (BSE) and National stock exchange (NSE) are two of the largest stock exchanges. Sensex is the index of BSE, while Nifty50 is the index of NSE. Let us first understand the term “index.”

What is an index?

An index is the weighted average of several stocks or other investment vehicles from the market and is calculated from the price of selected stocks.

Market Indexes are essential because:

It acts as an indicator in the market or a particular market segment. Most importantly, it is one of the critical indicators of a nation’s economic health.

Around 2100 companies are listed in both NSE and BSE combined, finding the best stock for investment. Here these Indexes act as a beacon light in finding, comparing, and sorting supplies.

An index helps an investor to compare the performance of a stock. An index can be used as a gauge to compare against.

Indexes are the best reflection of Investor sentiments. It is essential because if ideas are positive, there will be an extreme demand for a stock, and prices may rise and vice versa.

What is Sensex?

The term Sensex is a combination of Sensitive and Index. It is an index that reflects the Bombay Stock Exchange (BSE), and it is a benchmark stock market index of India’s oldest stock exchange, BSE Ltd.

Broadly, it serves to track the movement of India’s stock market. If the Sensex is rising on any given day, you can assume that most of the large and actively traded stocks on BSE would likely be trading higher and vice-versa.

Over the longer term, the Sensex movement can also gauge the performance of the Indian economy and various sectors.

What is nifty?

Nifty is a benchmark that is given to price scripts of different companies which are listed on NSE. NSE is a platform provided to companies for listing through IPO. So any investor can invest in such companies.

Nifty generate stocks from various sectors, including IT, consumer goods, financial services, telecommunication, etc.

How is Sensex calculated?

The market capitalization of each 30 companies comprising the index is first calculated by multiplying the price of the scripts with the number of shares issued by that company.

The market capitalization is then multiplied by the free-float factor to derive the free-float market capitalization.

We then divide the free-float market capitalization with the index divisor. This index divisor is the only link to the original base period value of the index.

This is how Sensex is calculated.

How is nifty calculated?

The calculation of NIFTY involves dividing the free-float market capitalization of 50 companies in the Index by a number called the Index Divisor.

Market capitalization is equal to the current market price multiplying outstanding shares.

The aggregate market capitalization of each script in the Index during the base period is the Index’s base market capitalization. During the base period, the market capitalization is equated to an index value of 1000, which is known as the base index value.

Free Float Market Capitalisation = Shares outstanding * Price * Investable Weight Factors (IWF)

Index Value = (Current Market Value / Base Market Capital) * Nifty Base Index Value (1000)

Critical differences between Sensex and Nifty

SENSEX is a specific market index for BSE Limited, previously known as the Bombay Stock Exchange. SENSEX Index includes 30 of the largest and most actively traded stocks on the BSE.

Whereas, Nifty is the stock market index for the National Stock Exchange (NSE). Nifty comprises 50 of the largest and most actively traded stocks on the NSE that cover 22 sectors of the Indian economy.

Sensex was launched on January 1, 1986. At the same time, Nifty was launched on April 1, 1996.

Sensex comprises 13 sectors. In contrast, nifty shall consist of 24 industries.

Sensex has better returns than nifty.

Conclusion

These two terms can be one of the essential concepts in foreign currency trading. These are the base rates given in any trading transaction in the foreign exchange market.

Sensex is the term in stock markets, while Nifty is used in Forex trading. These two terms are so important to investors because they are both used to indicate the state of the underlying stock prices.

If you have a particular stock in your hand and want to check if its price will rise or drop, you look at its Sensex and Nifty and compare it with the costs of other stocks in the same category.

Frequently Asked Questions

What is the role of nifty and Sensex?

Nifty and Sensex are significant ways of trading in the stock market.

Is Sensex better than nifty?

The only difference is that Sensex is 30 stocks while nifty comprises 50 stocks. Sensex is more niche, and top companies push its index value higher in the market. In contrast, Nifty is broader as it has 50 companies in the index.

How are stocks selected in Nifty & Sensex?

The stocks are short-listed based on a lot of qualitative and quantitative criteria.

Why is the base value set to 100 points?

The total value of shares in the market at the index construction is assumed to be ’100′ in terms of ‘points.’

Hence, it is easy to calculate and logically represents the change in terms of percentage. So, the next day, if the market capitalization moves up 10%, the index also moves 10% to 110.

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