Nifty vs Sensex: Key Differences You Should Know

There are three ways to invest in Nifty – direct investment in the underlying shares, investing through Index Funds, or trading in index-based derivatives.

It is to be noted that there is specific eligibility criteria for stocks to be included in a market index. The Index is re-balanced on a semi-annual basis. The cut-off date is January 31 and July 31 of each year. The constituents of the index may change as per the criteria.

What is Sensex?

Sensex is India's first equity index, which was launched in 1986 and has a base value of 100. It is the market index of the Bombay Stock Exchange (BSE), the oldest stock exchange in Asia.

It includes the top 30 companies listed on BSE chosen based on market capitalization, liquidity, and financially sound companies across sectors. Its value depends on the price movement of these underlying stocks.

In its early years, Sensex followed the weighted market capitalization method for indexing. However, since 2003, it has used free-float market capitalization for indexing purposes.

Both Nifty and Sensex are considered to be a measure of India's stock market performance and a reflection of the Indian economy. It is used as a benchmark to gauge growth and development in the Indian economy and industry and understand the stock market trend.

Sensex sector representation

Top constituents by weightage

*as on 30 Dec 2024

Sensex performance

Sensex is also re-balanced on semi-annual basis in June and December.

How to calculate Nifty and Sensex?

Both Nifty and Sensex index uses a methodology that is weighted according to the free-float market capitalization. This means that the weight of each stock in this index is determined by its market capitalization. However, Free Float Market Capitalization only takes into account the shares that are made available to the public. And this method helped remove the companies which have very small equity traded in the market.

Now, there are three steps to calculate an index value. Here's how it is done:

• Step 1: In the first step, the market capitalization of every company comprising the index is determined by multiplying the price of their stocks with the number of shares issued by the company.

• Step 2: The second step involves a free float factor — this means the market value of the holdings that is available for trading in the market.

Let’s say only 55% of the company is available to the public. Then the free float factor of the company would be 0.55.

Here’s how you can calculate the free float market cap with free float factor.

• Step 3: In the third step, the sum of the free-float market capitalization of all the stocks in the index is divided by a similar sum calculated during the base period. This ratio is then multiplied by the index’s base value — which is typically 100 or 1000. For instance, the base date for Nifty is 3 Nov, 1995, and the index value was 1000.

What is the Difference Between Nifty and Sensex?

Refer to the following table to make note of the key differences between the Nifty and Sensex market indexes:

Financial jargon to make note of:

• Base year – It is the reference year with which values of other years are compared. Both Nifty and Sensex have shown tremendous growth from their inception.

• Base number – It is the basic number considering which the value of the market index is calculated. The larger the difference between the base number of the market index’s current value the better it is.

Importance of stock indices

Well, here's how stock indices help you make informed decisions:

• Sorts from a wide range of stocks

With thousands and thousands of companies listed, how can you differentiate between all? And that's where a stock market index helps you to classify shares based on vital characteristics such as the size, liquidity, industry or sector and so on.

• Representation of the entire market or a segment

A broad stock market index represents the entire market. In India, the BSE Sensex and the NSE Nifty50 are regarded as broad indices representing overall market performance. Similarly, an index comprising IT stocks or FMCG stocks may represent major companies in the particular industry.

• Easy to compare performance

As an investor, you can use a stock market index to compare performance and use it as a benchmark. It can help you identify market trends quickly without having to compare individual stocks. That’s why some of the popular indices are also known as benchmark indices.

• Reflection of the market sentiments

When you invest in the stock market, you need to keep track of investor sentiment as it is an essential part of stock market movements. Stock market indices reflect investor’s mood/sentiment within sectors, company sizes and the overall market.

• Aids in passive investment

Several investors choose to invest in securities closely resembling an index. This is referred to as passive investment. This means if you invest in an Index Fund or ETF, the fund would mimic the composition and performance of the underlying index. Having an index portfolio can save you the time and effort in researching and selecting stocks.

Which is Better? Nifty vs Sensex

The question of a better market index, Nifty vs Sensex, always arises. Both Sensex and Nifty are the two prominent market indices in India. While Nifty is the benchmark index of the NSE, Sensex is the popular index of the BSE.

Investors closely watch the Sensex and Nifty. Both indices play a significant role in the growth of the Indian stock market and offer investors the opportunity to make profits and diversify their portfolios. There is no question of which is the better index as both are prominent and are broad market indexes.

Conclusion

In conclusion, Nifty and Sensex are pivotal benchmarks that encapsulate the performance of the Indian stock market, reflecting the broader health of the Indian economy. Both indexes serve as essential tools for investors, aiding decision-making by offering insights into market trends. Nifty, representing the National Stock Exchange's top 50 stocks, offers a wider sectoral coverage compared to Sensex, which comprises the top 30 stocks of the Bombay Stock Exchange. Despite their differences in ownership, constituents, and sectoral exposure, both indexes play a crucial role in gauging economic development and market dynamics, making them indispensable to investors and policymakers alike.

Additional read: https://www.icicidirect.com/ilearn/stocks/articles/difference-between-nse-and-bse

FAQs on Difference Between Nifty and Sensex

1. What is the basic difference between Sensex and Nifty?

Sensex is the broad market index of BSE, consisting of 30 companies, while Nifty is the primary index of NSE, comprising 50 companies.

2. How do Nifty and Sensex work?

Both Nifty and Sensex are stock market indices that track the performance of a basket of stocks. Nifty tracks the performance of the top 50 companies, while Sensex tracks the top 30 companies. Both indexes follow the floating market capitalization method for weighing each stock in the index.

3. Is Sensex better than Nifty?

There is no question of a better index. Both are prominent indexes representing broader markets and track their respective stocks.

4. Which is older, the Sensex or the Nifty?

Sensex is the older index launched on 1 January 1986, while Nifty was launched on 22 April 1996.

5. What is Sensex and Nifty in simple words?

Sensex is the broad market stock index of BSE, which consists of 30 stocks, and Nifty, the broad market index of NSE, which consists of 50 stocks.

6. Why is Sensex more than Nifty?

Sensex was launched in 1986 with a base value of 100, while Nifty was launched late in 1996 with a base value of 1000. Over a period, these indexes have grown to the current level.