The Sensex and the Nifty are two major stock market indices in India that track the performance of the largest and most actively traded companies on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), respectively. Despite both being indicators of the Indian stock market’s health, they differ in their composition and calculation methods, leading to variations in their values. Here’s an explanation of how each is calculated and why their values differ:
How Sensex Value is Calculated:
- Selection of Companies: The Sensex, or S&P BSE Sensex, includes 30 well-established and financially sound companies listed on the BSE.
- Free-Float Market Capitalization: The value of the Sensex is determined using the free-float market capitalization method. This method only takes into account shares that are available for trading in the market, excluding shares held by promoters, government, etc. The formula for calculating the Sensex is:
[
\text{Sensex} = \frac{\sum (\text{Price of Stock} \times \text{Number of Shares})}{\text{Base Year Market Capitalization}} \times \text{Base Index Value}
]
The base year is 1978-1979, and the base index value is set to 100.
How Nifty Value is Calculated:
- Selection of Companies: The Nifty, or NIFTY 50, comprises 50 diversified companies listed on the NSE.
- Free-Float Market Capitalization: Similar to the Sensex, the Nifty is also calculated using the free-float market capitalization method but includes more companies. The formula for calculating the Nifty is essentially the same as that for the Sensex but applied to the 50 companies in the Nifty and a different base year and base market capitalization.
Reasons for Difference in Values:
- Number of Companies: The Sensex tracks 30 companies, while the Nifty tracks 50, leading to differences in their market representation.
- Exchange Difference: The Sensex is based on the BSE, and the Nifty is based on the NSE. Although there is a significant overlap in the companies listed on both exchanges, the trading volume and market dynamics can differ.
- Calculation Base: The base year and the base index value from which growth is measured differ between the two indices, affecting their numerical values.
- Sectoral Composition: While both indices aim to have a diversified sectoral representation, slight differences in the sectoral weightage can impact their movements differently based on sectoral performance.
These factors contribute to the differences in the values of the Sensex and the Nifty, reflecting varying snapshots of the Indian stock market’s performance.
