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The stock market is highly volatile and constantly changing with time. A variety of variables are driving the adjustments. Market indices take these aspects into account and provide an overall picture of the performance of financial markets and the nation’s economy. Investors can make rational investing decisions after attentively examining the indices. In this blog, we will take a deep dive into what are Sensex and Nifty and how they function.
What is a Market Index?
A market index measures the aggregate performance of all companies listed on a stock exchange. It is a measure of many elements in the stock market, such as market performance, price fluctuations, and so on.
The stock market index captures all the changes that occur in the stock market. These indices assist investors in identifying patterns of stock market movement and allowing them to make stock investments accordingly.
The indices of the BSE and NSE are Sensex and Nifty, respectively. While the stock exchanges list the stocks in the market, the stock indices detail market fluctuations.
What is Sensex?
The Sensex, or BSE market index, commonly known as S&P BSE Sensex, is one of India’s oldest market indicators. Sensex is a short form for Stock Exchange Sensitivity Index. It is made up of the top 30 companies that are traded on the BSE.
The Sensex is generated using the free-float market capitalization technique, which reflects the performance of thirty companies. The free-float market capitalization technique displays the proportion of shares that are ready to trade and are issued to the public in the market by corporations.
To calculate the Sensex, the market capitalization of a company must be multiplied by the prices of its outstanding shares. The free-float market capitalization must then be computed using the free-flow factor.
Finally, the Sensex value is calculated by dividing the free-float market capitalization value by the index divisor of 100. It should be noted that the Sensex has a base value of 100.
What is Nifty?
Nifty is the short form of National Stock Exchange Fifty, a stock market index of the National Stock Exchange. Nifty is made up of the top 50 firms trading on the NSE. The Nifty is calculated using the same process as the Sensex, namely the free-float market capitalization method.
To achieve free-float market capitalization, the figure will be multiplied by the Investable Weight Factor (IWF). The IWF represents the proportion of stock market shares that investors can trade.
It should be noted that the base value for calculating Nifty is 1,000. Daily, the current market value is divided by the base market capital and then multiplied by the base value, i.e., 1,000, to calculate the Nifty index value.
Difference between Sensex and Nifty
- The term Sensex refers to the Stock Exchange Sensitive Index, which is a stock market index for the BSE, whereas Nifty refers to the National Stock Exchange Fifty, which is a stock market index for the NSE.
- Nifty is managed by NSE Indices Ltd, a division of the NSE. Sensex, on the other hand, is run by the BSE.
- The Sensex has a base index value of 100, while the Nifty has a base index value of 1000.
- The Sensex index consists of 30 well-established corporations which are traded on the BSE, while the Nifty index consists of 50 top companies that are traded on the NSE, respectively.
Factors that cause changes in the market index
Several factors influence the movement of Sensex and Nifty.
To begin with, the state of the global economy has a significant impact on indexes. A global economic downturn impairs the index’s performance.
Second, inflation has a negative impact on index performance. Inflation leaves investors with less capital to invest in company stocks. Furthermore, the corporations are suffering from significant economic costs, which will result in a stock market decline.
Importantly, fluctuations in interest rates cause a decline in the stock market.
When interest rates rise, so does the cost of lending. To manage the reduction in loans, corporations reduce their expenses, which further hampers the company’s stock market performance. As a result, index performance suffers.
The market indices are a substitute for investor sentiment. They aid investors in understanding market circumstances and enabling them to make sound investment decisions.
- The Nifty and Sensex are benchmark index values used to evaluate the overall performance of the stock market.
- The name Sensex refers to the Stock Exchange Sensitive Index, which is a BSE stock market index, whereas Nifty refers to the National Stock Exchange Fifty, which is an NSE stock market index.
- The stock market is extremely volatile and continuously changing. The changes are being driven by several factors. Market indexes consider these factors and present an overall picture of financial market performance.
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Q1. Why Sensex is bigger than Nifty?
Ans- The Sensex is based on the top 30 large-cap corporate equities traded on the BSE. Nifty considers a considerably broader basis, including the top 50 trading stocks, and hence, is more diversified. Because of the larger base, the value of the Nifty is frequently less than the Sensex.
Q2. How can I buy Sensex stocks?
Ans- You can begin investing directly in the SENSEX constituents and the weightage they hold in that index. This means you can directly purchase stocks in the amount equal to the stock’s weightage. Index mutual funds would be a great way to invest in the SENSEX.
Q3. Can I buy Nifty 50?
Ans- In India, you cannot acquire a percentage of stock, thus you must buy the entire stock rather than a portion of it.
This means you’ll have to spend a lot of money to buy all 50 stocks in the NIFTY 50.