What is Nifty and Sensex ? (Complete Guide)

 Nifty 50 and Sensex plays a very important role in the stock market. To understand what is Nifty and Sensex, first you need to understand what is an index, where do they come from and why do we need them.

National Stock Exchange and Bombay Stock exchange are the two major Stock exchanges in India where stocks are bought and sold. There are thousands of companies listed on the stock exchange and it is very difficult for an individual to check each and every company to evaluate the overall performance of the stock market, so the stock exchanges use index as an indicator that reflects the overall performance of the stock market.

What is an Index ?

An indicator used by stock exchanges that reflects the overall performance of the stock market or a specific sector is known as an Index.

An ideal index gives us minute by minute reading about how the market participants perceive the future. The movements in the Index reflect the changing expectations of the market participants. When the index goes up, it is because the market participants think the future will be better. The index drops if the market participants perceive the future pessimistically.

NIFTY 50 

 

• Nifty 50 is an index used by National Stock Exchange.
• It was published on 22 April 1996.
• It gives the market overview by tracking the performance of top 50 well established and the most actively traded companies selected from 24 different sectors as per the criteria.
• It is maintained by India Index Services & Products Limited (IISL) which is a joint venture of the National Stock Exchange and CRISIL (Credit Rating Information Services of India Limited)

 BSE SENSEX

• Sensex is used by the Bombay Stock Exchange.
• It was published on 1 January 1986.
• It gives an overview of the top 30 well established and the most actively traded companies listed on the Bombay Stock Exchange.
• It is maintained by S&P (Standard and Poor’s) an American credit rating company. 

NOTE:- For a stock to be selected in an index it should qualify certain criteria. Once qualified as an index stock, it should continue to qualify on the stated criteria and if it fails to maintain the criteria, the stock gets replaced by another stock that qualifies the requirements.

How NIFTY and SENSEX are calculated ?

Each company in an index holds a certain weightage. Higher the weightage higher will the contribution of that company in moving the index.

Weightage of a company in an index is decided from free-float market capitalization. Higher the market capitalization higher is the weightage.

NOTE:- Free float market capitalization is the product of the total number of shares outstanding in the market and the price of the stock.

For example, if a company has 1000 outstanding shares in the market, and the price of each share is Rs 200 then the free-float market capitalization will be 200000.

Now to calculate the index points of each company the weightage of each company is multiplied by the base value (both NIFTY and SENSEX has a base value of 1000 points) of that index. The index is represented by the total sum of real-time index points of each company. 

For example, there are three companies (A, B & C) in an index, and the base value of the index is assumed to be 1000. 

Company	Weightage	Points
A	0.5037	0.5037 X 1000 = 503.7
B	0.3836	0.3836 X 1000 = 383.6
C	0.3642	0.3642 X 1000 = 364.2
		Total points = 1251.5

Therefore the Index value is 1252.5.

Base Value – When an index is published, it is given an arbitrary value so that all the future values can be measured in comparison to that value.
 

Different practical uses of Index

Market Overview :– Index is used to observe the market movement i.e whether the overall market is going up or down.

Benchmarking :– People use index as a benchmark to see how their portfolio is performing in comparison to the market.

Trading :– You can also trade index in the derivative market. It is in fact the most popular use of index.

Portfolio Hedging :– Let’s suppose a person has invested in some stocks and that person is willing to hold them for a longer period of time, but he/she is expecting a big market movement in between the holding period and he/she is not sure that whether the market will go up or down. In this case, if the person wants to hedge his/her portfolio against any market movement he/she can trade in index options or futures according to his/her market view.