WHAT IS SENSEX, NIFTY AND BANK NIFTY?

TABLE OF CONENTS

  • Sensex Meaning - Know What is Sensex & How is it Calculated

  • What is NIFTY?

  • Eligibility Criteria for NIFTY Index Listing?

  • How is Nifty calculated?

  • How is Nifty different from Sensex?

  • WHICH SECTORS ARE COVERED IN NIFTY 50?

  • WHICH ARE THE STOCKS PART OF NIFTY?​

  • WHAT IS BANK NIFTY?

  • WHAT IS NIFTY IT?

Sensex Meaning - Know What is Sensex & How is it Calculated

For an investor it is very important to know the basic terminologies like Sensex meaning, what is Sensex, how the calculation are done.

Therefore, let us learn and understand about it here.

The term Sensex was named by a stock market analyst Mr. Deepak Mohoni, the word is a portmanteau of Sensitive and Index. The Sensex is primarily an index which reflects the Bombay Stock Exchange (BSE) which got established in 1875. Till Jan1, 1986 the stock exchange did not have any official index. This was the time when Sensex was opted for gauging the performance of the Indian market. The Sensex comprises of 30 prominent stocks which are derived from sectors and are traded actively in the exchange market. Sensex truly reflects the Indian stock market movement. If the Sensex value increases it means that there is a general increase in the prices of shares whereas, if the Sensex decreases it means there is a general decrease in the price of shares.

You can identify the booms and busts going in the stock market through S&P BSE Sensex. From Feb 19, 2013, BSE and S&P Dow Jones Indices entered into an alliance to calculate Sensex. Nifty is the other index calculated in India for the National Stock Exchange.

Sensex comprises of the 30 largest and most actively traded stocks on BSE, providing a gauge of India’s economy. The Sensex is one of the oldest stock indexes in India. Sensex is used to observe the overall growth, development of particular industries, ups and downs of the Indian economy by the investors.

Calculation Methodology for Sensex

Historically Sensex used the weighted market capitalization methodology, but from September 1, 2003, it shifted to Free Float Market Capitalization methodology. All the major indices in the world use the same methodology. The performance of the 30 selected key stocks directly reflects the level of the index.

Free-Float Market Capitalization = Market Capitalization * Free Float Factor

Now let’s see what is referred to as the Free Float Factor?

Free Float is referred to as that % of the total shares issued by the company that is readily available for trading in the market. It excludes the shares that are held by the promoters, government, etc.

To understand better let’s look at an example: If the company has 100 shares, in which 30 are held by the government or the promoters and the remaining 70 are available for trading to general public then, those 70 shares are the free-floating shares and thus the free float factor will be 70%. Whereas the word market capitalization represents the valuation of the company. Market capitalization is determined by multiplying the price of a stock with the number of shares issued by that company.

Hope till now you have learnt about what is Sensex meaning, its methodology; now let’s look how Sensex is calculated. The above two terminologies play a major role while calculating Sensex.

How Sensex is calculated?

  • The Sensex comprises of the 30 stocks which are selected according to the criteria set.

  • The Market Capitalizations of all the 30 companies are determined.

  • The Free Float Market Capitalization of all the 30 companies is determined.

  • Of all the 30 companies the Free Float Market Capitalization is summed up to get a total of all the Free Float Market Capitalization.

  • As the formula of Sensex= (total free float market capitalization/ Base market capitalization) * Base index value.

  • The base year to calculate Sensex is 1978-79, the base value is static but it has to be changed. According to BSE Rs. 2501.24 crore is to be used as the base market capitalization.

  • The base index value is 100.

Therefore,

Sensex= free float market capitalization of 30 selected companies /25041.24 crores* 100

(The free float market capitalization of 30 selected companies are added and which get divided by 2501.24 crores and multiplied by 100.)



What is NIFTY?

NIFTY is a market index introduced by the National Stock Exchange. It is a blended word – National Stock Exchange and Fifty coined by NSE on 21st April 1996. NIFTY 50 is a benchmark based index and also the flagship of NSE, which showcases the top 50 equity stocks traded in the stock exchange out of a total of 1600 stocks.

These stocks span across 12 sectors of the Indian economy which include – information technology, financial services, consumer goods, entertainment and media, financial services, metals, pharmaceuticals, telecommunications, cement and its products, automobiles, pesticides and fertilizers, energy, and other services.

NIFTY is one of the two national indices, the other being SENSEX, a product of the Bombay Stock Exchange. It is owned by the India Index Services and Products (IISL), which is a fully-owned subsidiary of the National Stock Exchange Strategic Investment Corporation Limited.

NIFTY 50 follows the trends and patterns of blue-chip companies, i.e. the most liquid and largest Indian securities.

NIFTY contains a host of indices – NIFTY 50, NIFTY IT, NIFTY Bank, and NIFTY Next 50; and is a part of the Futures and Options (F&O) segment of NSE which deals in derivatives.

Eligibility Criteria for NIFTY Index Listing?

The eligibility criteria for getting listed on the NIFTY Index are mentioned below –

  • The company must be a domicile of India and registered with the National Stock Exchange.

  • Stocks must possess high liquidity, which is measured by their average impact cost. It is the cost of security transaction execution in relation to the index weight as reckoned through market capitalisation. It should be 0.50% or lower than that for a period of 6 months while 90% of the observations are made on a portfolio of Rs. 10 Crore.

  • The company should have a trading frequency of 100% during the previous six months.

  • It should have an average free-floating market capitalisation, which is 1.5 times higher than the smallest constituent in the index.

  • Shares which have Differential Voting Rights or DVR are also eligible for the index.

The NIFTY Index is reconstituted every six months and considers the performance of a stock over such period. Depending on this performance, and given that a company and its stock fulfils all the eligibility criteria mentioned above, the list might include or eliminate new/old stocks respectively. In case any new additions and eliminations are done, the companies in question are informed through a notice four weeks before reconstitution.

Apart from a periodical routine, reconstitution can also be undertaken in case a company goes through a scheme of arrangements for events involving suspension, spin-off, merger and compulsory delisting.

How is Nifty calculated?

It is calculated using the free float market capitalization weighted method where the level of index reflects the total market value of the stocks relative to a particular base period.

Market Capitalization = Equity Capital * Price
Free Float Market Capitalization = Equity Capital x Price * Investible Weight Factor
Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)

*IWF is a factor which is used to determine the number of shares available for trading. The index is calculated on a real-time basis everyday as the value of scrip also changes daily.

Note: the base period selected for calculating Nifty50 index is the close price on Nov 3, 1995. The base value has been set at 1000 and the base capital at Rs. 2.06 trillion.

How is Nifty different from Sensex?

As such, there is no main difference between Sensex and Nifty as both targets towards large cap stocks. Both Nifty and Sensex are indices of stock market that indicate the strength of the market. The Nifty reflects the value of National Stock Exchange (NSE) whereas Sensex is the stock market index for Bombay Stock Exchange (BSE).

Nifty is broader as it consists of more listed securities i.e. 50 stocks whereas sensex contains 30 stocks. Also, Nifty is considered as to have a more diversified portfolio when compared to Sensex. More trading is noticed to happen in NSE when compared to BSE.



WHICH SECTORS ARE COVERED IN NIFTY 50?

In terms of sector representation, the Nifty consists of stocks from key sectors of the Indian economy. Financial services accounts for 40.39% weight, followed by Energy 14.38%, IT 13.71%, Consumer goods 10.66%, Automobiles 5.71%, Construction 3.99%, Metals 3.61%, Pharmaceuticals 2.15%, Telecom 1.84%, Cement & cement products 1.74%, Fertilisers & pesticides 0.72%, Services 0.67% and Media & entertainment 0.42%.

WHICH ARE THE STOCKS PART OF NIFTY?​

Think of the Nifty like you think of a wallet. Your wallet contains coins, Rs 10/20/50 notes, Rs 100 notes, Rs 500 notes and Rs 2000 notes. Similarly, the Nifty contains of different stocks. In terms of specific stocks, the top Nifty constituents are HDFC Bank Ltd. 10.99%, Reliance Industries Ltd. 8.93%, Housing Development Finance Corporation 7.85%, ICICI Bank Ltd. 5.87%, Infosys Ltd. 5.79%, ITC Ltd. 4.89%, Tata Consultancy Services Ltd. 4.87%, Kotak Mahindra Bank Ltd. 4.11%, Larsen & Toubro Ltd. 3.99% and Axis Bank Ltd. 3.44%.

WHAT IS BANK NIFTY?

Nifty Bank, or Bank Nifty, is an index comprised of the most liquid and large capitalised Indian banking stocks. It provides investors with a benchmark that captures the capital market performance of Indian bank stocks. The index has 12 stocks from the banking sector.

The top stocks of the index include HDFC Bank Ltd. 31.61%, ICICI Bank Ltd. 18.20%, Axis Bank Ltd. 13.02%, Kotak Mahindra Bank Ltd. 12.74% and State Bank of India 10.92%. Bank Nifty, like others, is computed using free float market capitalization method. It's index variant includes NIFTY Bank Total Returns Index or Bank Nifty TRI. The index was launched in 2003.

WHAT IS NIFTY IT

The NIFTY IT index captures the performance of the Indian IT companies. The NIFTY IT Index comprises of 10 companies listed on the NSE. The top stocks in Nifty IT include Tata Consultancy Services Ltd. 27.43% weight, Infosys Ltd. 27.04%, HCL Technologies Ltd. 8.52%, Wipro Ltd. 8.46% and Tech Mahindra Ltd. 8.22%. The Nifty IT index variant is NIFTY IT Total Returns Index.