The Indian stock market is not an easy environment to understand and traverse. With thousands of stocks listed on it, the equity market in India even made a spot for itself in the top five list in terms of capitalisation in March 2022. As a new investor or even a seasoned one, it can be difficult to identify opportunities and red flags before putting your money and time on the line. To make your decision-making process more manageable, understanding indices such as Sensex and Nifty can be extremely helpful.
Sensex and Nifty are essential as they help traders understand where the market – or a market subset – is heading. These indices make for a comparative benchmark that allows investors to compare and interpret market performance.
The scope of an index is not limited to one industry. It covers a range of sectors to give a more comprehensive picture of the market by comparing the current prices of stocks to their past corresponding values.
Sensex and Nifty 50
In India, the two indices that capture the market are Sensex and Nifty 50. These two indices belong to the two primary stock exchanges in the country, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Sensex is the index of BSE, and Nifty 50 is associated with NSE.
Sensex represents 30 of the biggest stocks on the BSE, and Nifty 50, as the name suggests, is made up of 50 companies spanning 13 sectors (as of April 2021).
Bombay Stock Exchange and Sensex
India’s Bombay Stock Exchange [BSE] was established in 1875 and was the first stock exchange in India. BSE deals with equity, derivatives, and mutual funds trading, covering 13 sectoral indices.
The 30 stocks that are represented by Sensex are not only the most actively traded but also the biggest stocks in the country. And by representing the big players, Sensex offers a glimpse into the overall state of the Indian economy. This list of 30 companies is not fixed and can be revised at the BSE’s discretion.
The relationship between BSE and Sensex is straightforward. It uses a base value of 100 for its calculation. You invest when the Sensex moves upwards and hold on to your position when it is moving in a downward trajectory. Therefore understanding Sensex can help investors make the right decision.
The National Stock Exchange was established in 1992 and was recognised in 1993 by the Securities and Exchange Board of India. Nifty 50 was launched on 22 April 1996 and received its name as it covers the weighted average of 50 stocks.
Much like Sensex, Nifty 50 too tracks stocks across industries. As the National Stock Exchange index, Nifty 50 covers 50 stocks of the largest (in terms of market cap) and most popular securities in the business. Unlike the Sensex baseline of 100, Nifty 50 uses 1000 as the baseline for calculating the index.
As a broader market index covering 24 sectoral indices, Nifty 50 provides investors with details about fund portfolios, derivative contracts, index mutual funds or exchange-traded funds.
In addition to presenting a historical snapshot of stocks, indices help provide up-to-date data that indicates the performance of not just one sector but also the economy as a whole. In this regard, Sensex and Nifty 50 have played an essential role in helping investors understand market movements.