What is Sensex and Nifty? Difference and How is It Calculated?

Nifty and Sensex are both stock indexes. Before learning more about them, let’s take a look at what is an index.A stock index is an organised list of the generally best established companies in their representative industry or sector, which are listed on an exchange. These companies span over several different sectors of the market and usually represent their respective sector. An index is considered to be a good indicator of the overall exchange it represents and even of the market in general. Indexes are also used to measure or create other financial values such as the rate of inflation or the rate of interest on certain instruments. They provide the investor with a valid benchmark against which they can compare the returns of a strategy or portfolio.

The stock market indicator of BSE, Sensex is also referred to as BSE Sensex. A weighted stock index of 30 well-established companies, with sound financials, the 30 companies represent different industrial sectors of the Indian economy.Regarded as the pulse of the domestic stock market, the index was first compiled in 1986. The oldest stock exchange in India , it is used by analysts to observe the growth and development of the Indian economy and industries. Following the liberalisation of the Indian economy in 1991, it witnessed enormous growth.

When initially launched in 1986, market capitalisation weighted methodology was used to calculate it. However, since 2003 free-float capitalisation methodology is being used to calculate it.Sensex’s level is a direct indication of the performance of the top 30 stocks of its constituent companies. In the free-float method, the proportion of readily traded shares is taken into account. To calculate, first of all, market capitalisation of a firm is considered, which is then multiplied by the free-float factor.The free float factor is found by a percentage of floated shares to outstanding ones. Then, Ratio and Proportion comes into the picture and they are used based on the base index of 100. All these then aids in determining the Sensex.

Derived from a combination of National and Fifty, Nifty is the benchmark index of the National Stock Exchange (NSE). Consisting of 51 actively traded stocks, Nifty was introduced in 1996. It is also known as Nifty50 or CNX Nifty . Nifty is owned by the India Index Services and Products Ltd.

Nifty too is calculated by using the free-float capitalisation methodology. The index value is arrived at: Market capitalisation = Equity capital X price Free float market capitalisation = (Equity capital x price) X Investible Weight Factor (IWF) Index Value = Current Market Value / Base Market Capital X Base Index Value (1000)

As such, there is no difference between the Sensex and Nifty. Both these indexes reflect the strength of the market. However, as Nifty consists of more stocks than the Sensex, it’s a little broader. Generally, it’s considered that Nifty has a more diversified portfolio than the Sensex. When compared to BSE, more trading is noticed to happen in the NSE.

There are three methods for investing in an index:

Mutual fund:

One can invest in an index by using a mutual fund, such as the nifty 50 mutual fund or nifty next fifty mutual fund. To invest, one can either invest directly through the AMC's website or through a broker.

ETF:

Exchange traded funds (ETFs) are traded on exchanges like stocks, and their prices change in real time. Investing in an index through an ETF is another popular and excellent method. To invest in an ETF, the simplest method would be to invest through a demat account.

Derivatives:

One can also trade on an index through derivatives, which include futures and options.