MarketsmithIndia Articles

Difference between Sensex and Nifty - Explained Easily!

November 17 2021 | Reading Time: 5 Minutes
What are Sensex and Nifty? What is the difference between Sensex and Nifty? Which one is the better index? These are the frequently asked questions by individuals who enter the world of the Indian financial market for the first time.
In this article, we’ll guide you through the basics of understanding Sensex and Nifty and how they differ from each other.
BSE Sensex:
Started in the year 1986, Sensex is regarded as the domestic Indian stock market. It is the benchmark index of the Bombay Stock Exchange (BSE) comprising the 30 largest and actively trading stocks in the country. BSE Sensex can be expanded as Bombay Stock Exchange Sensitive Index, from which a stock market analyst Deepak Monhani coined the term, Sensex. The regular trading session of the market is between 9:15 am and 3:30 pm. It is the oldest index in India.
The index is float-adjusted and market-weighted with semi annual reviews in June and December. The stocks that are a part of the index are representative companies from different industrial sectors. It is a leading indicator for understanding the performance of India’s most profitable companies, thus understanding the economic trends in India. A dollar-linked version of the Sensex, DOLLEX-30, was launched in 2005.
Calculated in Indian rupees and dollars, the index has a total market capitalisation of 3.7 trillion rupees. The base period of Sensex is 1978-79 and the base value is 100. The free-float capitalisation method used to calculate the index takes into consideration shares that are freely traded and the restricted shares or the ones held by insiders are left out of it. 
Per the methodology used for calculation, the index level at any point in time shows the free-float market value of the companies in the index to a base period. The calculations are done in real-time using the prices at which the trading is executed and updated on all trading workstations. The value of the index is dependent on the prices of the companies' securities. 
  • The objective of the index during selection is transparency and simplicity. The criteria for the selection of the companies include:
  • The company should be listed on BSE 
  • The company should fall into the category of large- to mid-cap companies
  • Generation of revenue from company’s core operating activities
  • The company should maintain the balance between the sector to which it belongs and the Indian equity market. 
  • The liquidity of the company shares
The index, formed by the combination of the words ‘National Stock Exchange’ and ‘fifty’, was developed by the National Stock Exchange (NSE), and its value was determined by the free-float market capitalization-weighted method.
The index, owned and managed by the India Index Services and Products (IISL), a fully-owned subsidiary of the National Stock Exchange Strategic Investment Corporation Limited, includes several indices such as Nifty 50, Nifty Bank, and Nifty IT. Out of these indices Nifty 50, earlier known as CNX Nifty, is one of the popular benchmark indices of India.
Developed in 1996, Nifty 50 consists of the top 50 stocks listed in the NSE and represents 65% of the total free-float market capitalization. These stocks are usually the largest and most liquid stocks from across various sectors, including information technology, financial services, telecommunications, energy, entertainment, and media and consumer goods. 
The base value of Nifty 50 is 1000 with the base capital of Rs. 2.06 trillion and the base year as 1995.
Based on the stock performance over a period of six months, the index is reconstituted twice a year. Occurrences of company suspension, spin-off, merger, and compulsory delisting also result in reconstitution. 
Nifty is what can be called a corporate action neutral index. In case of any corporate action such as bonus issue, rights issue, or stock split, Nifty will revamp to neutralise the impact. Being the broader index, Nifty 50 offers a better understanding of the financial state of the country’s market.
Eligibility criteria to be listed:
  • Company should be domiciled in India and registered with the National Stock Exchange.
  • A company should have highly liquid stocks with impact cost less than or equal to 0.50% in the past six months.
  • The stocks should have a 100% trading frequency
  • The company should have 1.5x higher free-float market capitalisation than the smallest index constituent.
  • Company shares with differential voting rights
How do you Measure Sensex and Nifty?
Sensex is calculated using the free-float method, which takes into account the market capitalisation of the 30 companies that are trading in the index. This method of measurement came into existence on September 1, 2003. Nifty also uses the same technique to measure its value.
 The free-float technique uses shares that are traded in the market and not the ones locked in such as shares held by institutional investors and promoters. This is referred to using the term Investible Weight Factor or IWF. The company’s market capitalization is measured by multiplying the share price with the number of shares traded or available in the market (deducting the locked-in equities). Thus, one gets the free-float market capitalisation with market cap is multiplied by IWF. The greater the value of IWF, the higher the shares held by institutional investors.
For calculating the index, the free-float market capitalisation of all its constituents is considered. The index value is measured by dividing the current market value by the base value of the index after multiplying with 1000. The current market value is the weighted aggregate average of the companies that constitute the indices and the base market capital is the weighted aggregate average of the companies traded on the index during its base period. 
Key differences:

1.Why is the value of Sensex more than Nifty?
Even though both Sensex and Nifty are evaluated based on the same methodology of free float market capitalization, they differ in value due to differences in the number of their constituents, base values, and base periods.
Since Sensex has a lower number of constituents, 30 as opposed to Nifty’s 50, the index has a higher value.
2.Is Sensex better than Nifty?
When considering returns, the companies comprising both indices tend to overlap and hence have similar historical returns in the long term. Although Nifty is believed to have more diverse companies, the indices work on the basis of the company’s weightage, making the exposure to risk in investing in the companies in either of the indices inconsequential. Moreover, Sensex is more niche and its value increases more in a bullish market. Nifty is a broad-based index and its value increases less when compared to Sensex. Hence, there is no better or worse among the two indices.
3.What is Sensex, Nifty, BSE and NSE?
Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the two main stock exchanges in India.
Bombay Stock Exchange was founded in 1875 while National Stock Exchange was established in 1972. While BSE is older, NSE is larger.
Sensex and Nifty are stock market indices within BSE and NSE, respectively.

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.

Related Article