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Every person who invests in the stock market in India is well known about Sensex and Nifty. In India, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are two major stock exchanges. Almost all the stock trading activities in India is performed in these two stock exchanges.
What is BSE?
BSE (Bombay Stock Exchange) is not only the first and largest stock exchange in India but it is also the oldest stock exchange in Asia. It founded on July 9, 1875, in Dalal Street of Bombay: now Mumbai. Till date, BSE has more than 6000 companies listed. In addition to shares of companies, stock futures, stock options, derivatives, mutual fund units etc. are also trade on BSE. The overall performance of BSE is measured by Sensex which compromise of 30 stocks. The benchmark index of BSE is the SENSEX.
What is Sensex?
The Sensex is primarily a free-float market index of 30 well established and financially strong companies that are listed on the BSE.
Sensex was introduced on 1st April 1979. So, the base year of Sensex is 1978-79 and the base value is 100. The main reason behind the fluctuation in the Sensex is the up and down in the share price of these 30 companies. If the value of the SENSEX starts to rise, it means that the stock prices are going up and if the value of the SENSEX starts falling, it means that the stock prices are going down.
How Sensex is calculated?
Initially, the weighted market capitalization method was used for calculating the value of SENSEX.
Now, it shifted to “Free Float market capitalisation” methodology with effect from September 1, 2003. All major indices around the world use this free-float methodology.
The fluctuation of Sensex is calculated based on fluctuation of the share price of all these 30 companies which
- Sensex compromises of the stocks of 30 different companies. These 30 companies are selected on the basis of various criteria.
- The Market capitalisation of these 30 companies is determined.
- Free float market capitalisation of these companies is determined. The market capitalisation is multiplied with the free float factor to determine the free-float market capitalisation.
- Free float market capitalisation of all the 30 companies are summed up to arrive at total free-float market capitalisation.
- Formula to calculate Sensex is mentioned below:
Sensex= (total free-float market capitalisation/Base market capitalisation)*Base index value
- The base year of calculation of Sensex is 1978-79
What is NSE?
NSE (National Stock Exchange) is the leading stock exchange in India and was founded in 1992 with headquarter in Mumbai. NSE was the first stock exchange in India which introduced the electronic trading facility to the investors.
Nifty is the benchmark index of NSE which compromise of 50 stocks and it was launched by NSE in 1996.
What is Nifty?
The Nifty is a National Stock Exchange, NSE’s benchmark broad-based stock market index. Nifty is also referred to as Nifty50. Nifty represents the weighted average of stocks of fifty companies across 12 sectors.
National Stock Exchange’s Nifty50 is a popular stock market index in India. It was launched on 1st April 1996. Nifty50 is reported to be the World’s most actively traded contract. The base value of Nifty50 is set as 1000 and a base capital of Rs 2.06 trillion.
How Nifty is calculated?
Nifty is also calculated through the free-float market capitalisation weighted method. Just like Sensex, Nifty also follows a mathematical formula based to know the market capitalisation. It multiplies the Equity capital with the price to drive the market capitalisation.
Key points while calculating Nifty
- 1995 is taken to be the base year
- The base value is set at 1000
- The Nifty calculation is done taking into consideration 50 stocks that are actively traded on NSE
What is the difference between Sensex and Nifty?
- Nifty is derived from ‘National Fifty’; Sensex is derived from ‘Sensitive Index’
- Sensex is operated by the Bombay Stock Exchange (BSE), while Nifty is operated by the India Index Services Products Ltd. (IISL), which is a subsidiary of National Stock Exchange (NSE)
- Nifty consists of 50 selected stocks from the top 50 companies, which are used to determine the index, while Sensex consists of 30 selected stocks from the top 30 companies, which are used to determine the index
- The base index value of Nifty is 1000, while the base index value of Sensex is 100.
- Nifty was launched on 1st April 1996, while Sensex was launched on 1st April 1979.
What is meant by free float?
Free-float is the percentage of total shares issued by the company that is readily available for trading in the market. It excludes shares held by promoters, government, etc.
To understand it better let’s look at the example: If the company has 1000 shares, in which 300 are held by the government or the promoters and the remaining 700 are available for trading to the general public then, those 700 shares are free-floating shares and thus the free float factor will be 70% or 0.70
Let us take another example, Company ‘X’ issues 100 shares, out of which 20 shares held by the government, 50 shares held by directors of the company and remaining 30 are available in the open market for trading. The market price of a share is Rs 10
Total Shares = 100
Shares Held by Government = 20
Shares Held by Directors = 50
Shares available in the Open Market = 30
Market Price of Share = 10
Here the total market capitalisation of the company is 100 X 10 = 1000 and
Free float market capitalisation of the company is 30 X 10 = 300
According to the principles of BSE, any shares which don’t fall into the following categories are considered as free float (open market) shares.
- Government holding shares as promoters
- Holding by Directors/Founders
- Holding through the FDI route
- Stakes held by private corporate bodies and individuals
- Any cross-holdings i.e. equity held by an associate or group companies
- Equity held by employee welfare trust
- Locked-in shares and shares which would normally be sold in the open market.
What is meant by market capitalisation?
Market capitalisation represents the valuation of a company. It is determined by the price of their stocks with the number of shares issued by the company.
Market Capitalisation = Price * Quantity