Nifty vs Sensex: Difference between Sensex and Nifty

In this article, we will discuss

• What is Nifty?
• What is Sensex?
• Differences between Nifty and Sensex

The stock market is a crucial part of the modern economy. The stock market indices are vital in tracking the market's performance. In India, two of the most popular stock market indices are the Nifty and the Sensex. Both these indices serve as benchmarks to measure the performance of the Indian stock market. They provide valuable insights to investors, traders, and analysts. While the NSE indices and the BSE indices serve similar purposes, the indices differ. Investors can track the performance of Nifty and Sensex today live through various financial news websites and mobile applications. Keeping a close eye on indices can provide investors with real-time insights into the current state of the Indian equity market. Understanding these differences is crucial for investors and traders. It helps them to track the performance of the Indian stock market and make informed investment decisions. 

What is Nifty?

The Nifty is a stock market index introduced by the National Stock Exchange of India (NSE) in 1996. It is also known as the Nifty 50 and is one of India's most popular and tracked indices. The Nifty serves as a benchmark to measure the performance of the Indian equity market. It comprises the top 50 companies listed on the NSE. The Nifty comprises companies from various sectors of the Indian economy. These sectors are banking, finance, information technology, oil and gas, and consumer goods. The composition of the Nifty is reviewed every six months. The companies listed on the index are selected based on their market capitalization, liquidity, and other factors. The calculation method of the Nifty is based on the free-float market capitalization-weighted method. This method considers the number of shares available for trading and the market value of those shares. It ensures that the index reflects the actual market capitalization of the companies listed on the NSE. The base year for the Nifty is 1995, and the base value is set at 1,000 points. The significance of the Nifty in the Indian stock market is immense. It is a barometer of the Indian economy. It is utilized by investors, traders, and analysts to monitor the Indian equity market's performance and make investment decisions. The Nifty is a benchmark to measure the performance of mutual funds and exchange-traded funds (ETFs) based on the index. It is also a reference point for derivative instruments such as futures and options. 

What is Sensex?

The Sensex, also known as the S&P BSE Sensex, is India's oldest stock market index. It was introduced by the Bombay Stock Exchange (BSE) in 1986. It comprises 30 of the largest and most traded companies listed on the BSE. The companies listed on the Sensex depend on factors such as market capitalization, trading volumes, and financial performance. The BSE reviews Sensex's composition in intervals. The companies are added or removed based on changes in their market capitalization or other factors. The Sensex comprises companies from various sectors. These companies vary from banking, energy, technology, and finance to consumer goods. The calculation method of the Sensex is based on the free-float market capitalization-weighted method, like that of the Nifty. But, the Sensex only considers the total number of shares available for trading. It does not include shares held by promoters, governments, or other entities not available for trading. The base year for the Sensex is 1978-79, and the base value is set at 100 points. The significance of the Sensex in the Indian stock market is significant. One can stay updated with the performance of Sensex by checking the Sensex today live updates on various financial news websites. By monitoring the NSE indices and the BSE indices, investors can gain insights into the overall health of the Indian economy and make informed decisions about their investments.  The Sensex is an important indicator of the health of the Indian economy. Its performance is watched by market participants and policymakers alike. The Sensex is also used as a benchmark to measure the performance of mutual funds and exchange-traded funds (ETFs) based on the index. 

Differences between Nifty and Sensex

Both the Nifty and Sensex are indices used to gauge the Indian equity market's performance, yet there are notable distinctions between the two. Familiarizing oneself with these differences can aid investors in making informed decisions regarding their investments in the stock markets.

1. Calculation Method

Nifty and Sensex use different calculation methodologies. While both indices are free-float market capitalization-weighted, the Sensex considers only the total number of shares available for trading. On the other hand, Nifty considers the market value of those shares. This means that the composition and weightage of the companies included in the indices can differ. The market capitalization of each company in the index is calculated by multiplying its share price by the number of shares available for trading. But, the free-float market capitalization calculation for the Nifty and Sensex differs. The Nifty considers only the free-float market capitalization. A company's market capitalization is calculated by excluding shares unavailable for trading. It includes shares held by promoters, governments, and strategic investors. This approach intends to provide a more accurate representation of the company's market value. It reflects only the shares that are available for trading. In contrast, Sensex only considers the total number of shares available for trading. It is regardless of whether promoters or other entities hold them. This approach can result in a higher weightage for companies. Here the promoters or other entities hold a higher percentage of shares that are not available for trading. As a result of these differences in calculation methods, the composition and weightage of companies included in the Nifty and Sensex can differ. For example, a company with a large percentage of shares held by promoters may have a higher weightage in the Sensex than in the Nifty. This is because Sensex does not exclude those shares from its market capitalization calculation.

2. Composition and Weightage

The Nifty comprises the top 50 companies listed on the National Stock Exchange (NSE). In contrast, the Sensex comprises 30 of the largest and most actively traded companies listed on the Bombay Stock Exchange (BSE). The companies included in the Nifty and Sensex can differ. Although there is some overlap between the two indices. The weightage of individual companies in the indices can differ due to differences in their market capitalization. Both NSE and Sensex indices aim to represent the total performance of the Indian stock market. But, they differ in their approach to selecting the companies included in the index. The Nifty includes the top 50 companies listed on the NSE based on their market capitalization and liquidity. These companies vary from various sectors and industries. It includes finance, technology, consumer goods, energy, and healthcare. Their free-float market capitalization determines the weightage of individual companies in the Nifty. It means that companies with a higher market capitalization have a larger weightage in the index. In contrast, the Sensex includes 30 of the largest and most traded companies listed on the BSE. These companies are selected based on their market capitalization, liquidity, and trading frequency. The composition of the Sensex is also reviewed in short intervals. This ensures that it continues to represent the performance of the Indian stock market. Like the Nifty, the weightage of individual companies in the Sensex depends on their market capitalization. Still, it considers all the shares available for trading, not only the free-float shares. As a result of these differences in composition and weightage, the Nifty and Sensex can differ in their performance. It also varies in the representation of different sectors and industries. For example, Nifty may have a larger representation of technology companies. In contrast, the Sensex may have a larger representation of finance companies. Investors and traders use this information to gain insights into the performance of different sectors and industries. They make investment decisions based on the performance of individual companies and the stock market.

3. Representation of Industries and Sectors

Both the Nifty and Sensex indices represent companies from various sectors of the Indian economy. Yet, the industries and sectors represented can differ. The Nifty has a higher representation of companies from the information technology and financial sectors. In contrast, Sensex has a higher representation of companies from the energy and consumer goods sectors. It is important to note that the weightage of different sectors and industries can vary depending on the index's composition. These differences in the Nifty and Sensex's representation of industries and sectors can be attributed to each index's different selection criteria and weightage calculations. Investors and analysts use this information to gain insights into the performance of different sectors and industries. They make investment decisions based on the performance of individual companies and the complete market.

4. Historical Performance

While the Nifty and Sensex have shown strong historical performance, there have been periods where one index has outperformed the other. Both indices have shown strong growth over the years, with occasional periods of underperformance. Various factors, such as changes in government policies, global economic trends, and geopolitical events, can influence the performance of the indices. It is also important to note that the performance of individual companies within each index can influence the complete performance of the index. For example, suppose a large-cap company within the index experiences a significant increase or decrease in stock price. In that case, this can also impact the index's performance as a whole. Investors and analysts use the historical performance of the Nifty and Sensex as a reference point for assessing the indices' future potential. It helps them make investment choices based on the performance of stock market companies and the stock market as a whole.

5. Correlation and Divergence between Nifty and Sensex

While Nifty and Sensex are both used as indicators of the health of the Indian equity market, they do not always move in sync. At times, one index may outperform the other due to differences in the composition and weightage of the companies included in the indices, leading to divergent performance between the two. While both NSE indices and the BSE indices serve as indicators of the Indian equity market's health, they are not always correlated. For example, during the COVID-19 pandemic in 2020, the Nifty and Sensex experienced divergent performances. The Nifty outperformed the Sensex due to the higher representation of technology companies. In contrast, during the years following the global financial crisis of 2008, the Sensex outperformed the Nifty. It was due to Sensex's higher representation of energy and consumer goods companies. Moreover, there can be differences in the composition and weightage of the companies included in the indices. This can lead to divergent performance. For example, suppose a particular sector or industry experiences significant growth or decline. In that case, this can impact the index's performance which has a higher representation of companies from that sector or industry. Investors and analysts use the correlation and divergence between the Nifty and Sensex to gain insights into the health of the Indian equity market. They identify opportunities for investment based on the performance of individual companies and sectors within each index.

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Conclusion

NSE indices and the BSE indices are the two most followed equity indices in India. They represent a diverse group of companies across various sectors of the economy. Both indices act as indicators of the health of the Indian equity market. Various financial news websites and mobile applications allow investors to monitor the performance of Sensex today live. Some key differences exist between the two. These include their calculation method, composition, weightage, representation of industries and sectors, historical performance, and correlation and divergence. Understanding these differences is vital for investors and analysts. It helps them to gain insights into the performance of individual companies and sectors within each index and the health of the Indian equity market. Investors can identify investment opportunities and make informed decisions about their portfolios by monitoring the Nifty and Sensex. Despite the differences between the two indices, the Nifty and BSE Sensex have demonstrated solid historical performance. They have been instrumental in driving the growth of the Indian economy. As India continues to emerge as a significant player in the global economy, the Nifty and Sensex will likely remain important indicators of its progress and development. Open a demat account hassle-free with Samco, one of India's top online brokerage firms. Benefit from their competitive brokerage rates and wide range of value-added services that help you easily manage your investments. Click now to open your Demat account with Samco today and start trading!