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As an aspiring stock trader, you must have often come across the terms, the Sensex crossed 80,000 or Nifty fell by X points today! Ever wondered what these terms mean?
Joining stock trading classes in pune will help you acquaint yourself with them.However, before you begin your journey, learning the basics about the benchmark indices will help you make a more prepared and informed entry into the share market space.
What is Nifty 50?
Nifty means National Stock Exchange Fifty. It is the equity benchmark index of the National Stock Exchange (NSE). The difference between Nifty 50 and Sensex is the number of stocks each has. Nifty 50 comprises stocks from the top 50 of approximately 1600 companies that trade actively in NSE across 24 sectors.While the number may seem small, these 50 stocks constitute about 65% of the total free-float market capitalization of the index.
What is Sensex?
This is the market index of the Bombay Stock Exchange (BSE). The BSE introduced Sensex in 1986, a period when it followed the weighted market capitalization method.Then, in 2003, Sensex moved to the free-float market capitalization method. Sensex has a base value of 100 for calculation.
A significant difference between Sensex and Nifty is that of the base year used for calculation. Thus, the base year for calculation is 1978-79.
How Do You Calculate Nifty?
Nifty 50 uses a methodology weighted based on the free-float market capitalization. This refers to determining the weight of the stock in the index by its market capitalization. However, you must note that only shares publicly available for trade are considered. So, to calculate the Nifty, you must first derive the market capitalization of the constituents by multiplying the number of shares with their prices.
The formula is Market Capitalization = Outstanding Shares x Price
Next, to determine the free-float market capitalization, you must multiply the Investable Weight Factor with the original market capitalization. The Investable Weight Factor signifies the share proportion investors can freely trade in the stock market. So, in other words, it is the percentage of shares that a company’s directors or promoters don’t hold.
Free-float Market Capitalization = Market Capitalization x Investable Weight Factor
Eventually, you must calculate the index value by dividing the current market value by the base market value and later by multiplying it by the base index value (1000).
Index Value = (Current Market Value / Base Market Capital) x 1000
The index indicates the returns an investor can earn if they invest in a particular portfolio.
How to Calculate Sensex?
Sensex uses a free-float market capitalization weighted technique. Let’s see how to calculate the Sensex.
- Market Capitalization: The total value of a company’s publicly traded shares, which is share price X number of shares.
- Free Float Factor: This factor counts only the shares available for trading. It doesn’t count promoter or locked in shares, thus providing a realistic picture of liquidity.
- Index Divisor: A number that maintains index stability during dividends or stock splits.
Let’s look at the formula.
Sensex = Sum of Free-float Market Capitalization of 30 companies / Divisor X Base Index Value. Thus, if the combined market cap of these companies is Rs. 20 lakh crores, and the divisor is 1,000, then Sensex will be 20,00,00,00,00,000 / 1,000 X 100 = 10,00,000 points.
Nifty 50 to Sensex secrets Your journey from stock market beginner to confident trader starts here
Who Makes up Nifty 50?
Some of the sectors that constitute Nifty 50 include:
- Banking and Financial Services
- Pharmaceuticals
- Automobile
- Fast Moving Consumer Goods
- Metals and Mining
- Energy and Utilities
- Information Technology
To be part of Nifty 50, companies must be:
- Amongst the top 150 companies by market cap on NSE
- Adequately liquid and have regular trading volumes
- Meeting domicile and listing rules
- Consistently performing financially and have a solid market reputation
Additionally, there must be a balanced sector representation to prevent a few industries from dominating the market.
Who Makes up the Sensex?
Sensex tracks 30 blue-chip firms from sectors like:
- Energy
- Consumer Goods
- Banking and Finance
- Healthcare
- Industrial
- Telecommunications
To be part of Sensex, companies must have:
- High liquidity
- Robust market reputation
- Proven financial track record
- Significant free float market capitalization
- Financial stability
- Sectoral diversity for a balanced representation
Nifty and Sensex Differences at a Glance
Here’s what makes Nifty 50 and Sensex different.
| Aspect | Nifty 50 | Sensex |
| Number of Stocks | 50 | 30 |
| Base Year | 1965 | 1978-79 |
| Base Index Value | 1000 | 100 |
| Ownership and Exchange | NSE | BSE |
| Market Representation | Wider market exposure with more stocks | More focused on big players |
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