Once you become aware of the benefits of investing, the stock market has your attention, and you begin learning about investing. As you learn about the stock markets, you get introduced to different terms like the primary market, PE Ratio, and derivatives. This article will cover the Nifty, a ubiquitous term in the stock market.
If you have just started learning about investing, you may not know “what is Nifty“. However, you have likely come across this term before. If you consumed financial news or heard investors speak, you may have gauged that investors refer to the nifty to assess the collective performance of the Indian stock market. For instance, while watching a financial channel, the anchor may often say the Nifty is up or down by X points. However, at the same time, you also notice investors similarly using the term Sensex. So, how does the Nifty differ from the Sensex?
What is an Index?
Before we look into the Nifty and understand how it differs from the Sensex, we must comprehend the concept of an index. In the stock market, a stock index comprises a list of companies trading on a stock exchange. The exchange meticulously curates the list of companies based on predefined prerequisites. An index may constitute companies from a single sector or multiple sectors. The latter type of index generally includes all the major sectors and hence is one of the best indicators to gauge the economy and the stock market.
What is Nifty?
From the previous paragraph, you should figure out that the Nifty is an index belonging to the latter category. The Nifty, as called the National Stock Exchange 50 or the Nifty 50, is the benchmark index of the NSE (National Stock Exchange). The NSE introduced the index in 1996, which started with a base value of 1000. The Nifty 50 constitutes the top 50 companies across multiple sectors listed on the NSE. So, all the companies that make up the Nifty 50 are large-cap companies with high liquidity. It may come across as surprising, but the constituents of the Nifty 50 represent approximately a third of the total market capitalization in India.
The reconstitution of the Nifty 50, which entails the addition of new companies and the removal of existing ones from the index, takes place twice a year. So, at the time of reconstitution, new companies may replace older ones if they better fit the Nifty 50 index criteria.
What Is Sensex?
Now that you know, the Nifty 50 is the benchmark index of the NSE, used to gauge the performance of the stock market. So then, why do some analysts and investors refer to the Sensex? That is because the Sensex is also a benchmark index, but unlike the Nifty, the Sensex is the benchmark index of India’s other major stock exchange, the BSE (Bombay Stock Exchange). Hence, investors also refer to the Sensex, also called the S&P BSE Sensex, to analyze the performance of the Indian economy and stock market. However, there are significant other differences between the Nifty and Sensex.
Differences Between the Nifty and Sensex
- Besides being the benchmark indices for their respective stock exchanges, the second significant difference is regarding the number of continents of each index. The Nifty, as we know, comprises the top 50 companies listed on the NSE. In contrast, Sensex features the top 30 companies listed on the BSE.
- The Nifty was coined from “national” and “fifty”. The Sensex, on the other hand, is the amalgamation of the words “sensitive” and “index”.
- The Sensex is a much older index than the Nifty, with 1978-79 as the base year. In comparison, the base year of the Nifty 50 is 1995.
- Regarding base value, compared to the Nifty’s 1000, the Sensex started at 100.
Since the number of constituents differs in both indices, they behave slightly differently in various market conditions. The Sensex tends to be more volatile than the Nifty, as it has few companies. So, during a bull market, the Sensex is likely to rise by a higher value than the Nifty. However, in a bear market, it also falls by a more considerable margin.
Conclusion
Now that you know “what is Nifty” and the differences between the Nifty and the Sensex, which index should you refer to? If you are investing in equity, both indices are equally good, and it is up to you to decide. However, if you are trading Nifty derivatives, you analyze the Nifty. To start investing, you must open a Demat account, and if you wish to learn something else first, consider reading about the primary market.