National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are two key stock exchanges in India where stocks of thousands of listed companies are traded. Because of this gigantic pool of companies, it becomes tough to assess the overall market condition. There comes the importance of stock indices like the SENSEX and NIFTY 50.
This article covers what a stock indice is, all about NIFTY 50, including how to calculate it, all about SENSEX, including how to calculate it and finally, key differences between SENSEX and NIFTY 50.
What Is A Stock Index?
Indices are usually reflectors of the performance of a universe based on the representative baskets of items. Similarly, stock indices are the reflector of overall market performance and act as a benchmark against which the performance of stocks is compared in a given period.
Suppose a stock’s price rose by 2% in a day when the stock indice rose by 2.5%. In such a case, that stock is said to have underperformed compared to the overall stock market.
The value of stock indices is calculated from the stocks they constitute. Here is detailed information about two key stock indices of India.
What Is NIFTY 50?
NIFTY 50 is the stock market indice reflecting stock market performance based on the top 50 companies listed on the National Stock Exchange (NSE).
About NIFTY 50
NIFTY 50 was established by National Stock Exchange (NSE) in 1996 and is abbreviated from National Stock Exchange Fifty. It tracks the performance of large-cap and most-liquid stocks.
Its 50 constituents are selected from various sectors such as:
- Information Technology (IT)
- Metals and mining
- Telecommunications, etc.
How To Calculate NIFTY 50?
Here are some points to remember before getting into the calculation of NIFTY 50.
- The NIFTY 50 calculation uses the free-float market capitalisation weighted method.
- The base market capital of NIFTY 50, which is the weighted aggregate market capitalisation of all 50 companies in the indice in the base period, is considered ₹2.06 trillion. The base period for the calculation of NIFTY 50 is November 3, 1995.
- The base index value taken for NIFTY 50’s calculation is 1,000.
Here is the step-by-step process of NIFTY 50 calculation:
- The first step is to arrive at the total market capitalisation of all constituents, which is the product of their total number of outstanding shares and stock prices.
- The next step is to compute the free-float market capitalisation of all constituents. It is calculated by excluding the shareholding of promoters, government holding, the equity owned by associate/group companies, employee welfare trusts and shares under the lock-in category from the total outstanding shares.
- Based on the free-float market capitalisation, stocks are assigned weights. The multiplication of free-float market capitalisation and weights will result in weighted free-float market capitalisation.
- The sum of the weighted free-float market capitalisation of all 50 companies gives the current market value of an indice. Finally, here is the formula for NIFTY 50 calculation:
NIFTY 50 = (Current market value/Base market capital)*Base index value
Base market capital = ₹2.06 trillion
Base index value = 1,000
What Is SENSEX?
SENSEX is the stock market indice reflecting stock market performance based on the top 30 companies listed on the Bombay Stock Exchange (BSE). It follows the performance of 30 large-cap and most liquid stocks.
SENSEX, the benchmark indice of the Bombay Stock Exchange (BSE), was launched in 1986 and is the abbreviation of the sensitive index.
Its constituents are selected from various sectors such as:
- Information Technology (IT)
- Food and beverages, etc.
How Is SENSEX Calculated?
Here are some points to remember before getting into the calculation of SENSEX.
- The SENSEX calculation uses the weighted free-float market capitalisation method.
- The base market capital of SENSEX is considered ₹2,501.24 cr. (₹0.025 trillions). The base year for the calculation of SENSEX is 1978-79.
- The base index value taken for SENSEX’s calculation is 100.
Here is the step-by-step process of calculation of SENSEX.
- The market capitalisation of all 30 constituents is calculated by multiplying their total outstanding shares by their stock prices.
- The free-float market capitalisation for all 30 companies is computed by excluding privately held shares from total outstanding shares.
- The free-float market capitalisation for all 30 companies is summed up to arrive at the total free-float market capitalisation.
Finally, here is the SENSEX calculation formula:
SENSEX = (Total free-float market capitalisation/ base market capitalisation) * Base index value
Base market capitalisation = ₹2,501.24 crore
Base index value = 100
SENSEX Vs NIFTY 50: Key Differences
|Point of difference||SENSEX||NIFTY 50|
|Owned by||Bombay Stock Exchange (BSE)||NSE Indices Limited, a subsidiary of the National Stock Exchange (NSE)|
|Year of introduction||1986||1996|
|Abbreviated from||SENSEX is an abbreviation of sensitive and index.||NIFTY 50 is an abbreviation of national and fifty.|
|Number of constituents||30 companies||50 companies|
|Sectors||Constitutes companies from 15 sectors (as of September 16, 2022)||Constitutes companies from 17 sectors (as of September 16, 2022)|
|Base index value for calculation||100||1,000|
|Base period for calculation||1978-79||November 3, 1995|
SENSEX and NIFTY 50 are crucial stock indices of India’s two leading stock exchanges. Several companies are listed on both stock exchanges and have places in the SENSEX and NIFTY 50 indices. Both represent stock market performance.
However, they differ in terms of owners, incorporation years, the number of constituents and sectors and calculation. Though, no indice of two is superior to another.
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NIFTY 50 is one of the benchmark indices in India, with which investors may compare their portfolio to decide whether it is performing well. NIFTY 50 gives you an overview of market behaviour as it consists of top companies. Plus, it is used as an underlying index for index funds.
SENSEX consists of the top 30 companies listed on the Bombay Stock Exchange based on free-float market capitalisation.
As SENSEX is an indice and not a financial instrument, you cannot buy it. However, you may consider index funds that mirror the performance of the SENSEX.
NIFTY 50, being an indice, is not a purchasable financial instrument. However, you may consider index funds that mirror the performance of the NIFTY 50.