As an Indian with a newly minted investor status, it’s nothing but natural to hear these two jargon terms dished out at you time and again: Nifty 50 and Sensex. Nifty 50 and Sensex are just stock market indexes-the former being an index of the 50 top stocks and the latter a barometer of the 30 top stocks-you would want to know if they are giving you a snapshot of how the Indian stock market is doing. But what do these terms actually mean-and how useful are they to investors? In this post on our blog, we break down the basics of Nifty 50 and Sensex, explain how they’re constructed, and look into the significance of these for new investors.
What Are Stock Market Indices?
Let’s understand first what a stock market index is.
A stock market index is a statistical measure that reflects the general performance of a particular group of stocks. In other words, an index is one means to track how the stock market – or a segment of the market-is doing. Imagine an index as a benchmark that reflects the health and movement of a piece of the market. Indices reflect the average performance of the chosen stocks; with it, the investor has an instant overview of what the market is doing.
For example, if you are tracking the Nifty 50 or Sensex, then the indices actually represent average performing groups of stocks. Therefore, if an index rises it simply implies that most stocks within that index are doing great. However, if the index drops it simply suggests most of the stocks in the index are flopping.
What Is Nifty 50?
It is an index of stocks that represents the performance of the top 50 companies listed on the National Stock Exchange in India. NSE in 1996 came up with this and, over the years, it has developed into one of the biggest yardsticks of the Indian stock market.
So, here’s what you need to know about Nifty 50:
Sector Representation:
Nifty 50 comprises companies of nearly all sectors like banking, IT, energy, consumer goods, pharmaceutical, and so on. This diverse lot helps the index reflect the health of the Indian economy generally.
Nifty 50 is a market capitalization-weighted index, meaning the weight of every company in this index is proportional to its market capitalization, the total market value of outstanding shares. Which means the large companies like Reliance Industries, HDFC Bank, and Tata Consultancy Services (TCS) would have a bigger weight in this index than a smaller company.
Key Indicator:
Sensex is a barometer in which institutional investors, fund managers, and retail investors use it as a way of tracing the Indian stock market. Most exchange-traded funds and mutual funds are also established to replicate the sensex performance, thereby offering investors a diversified, low-cost way of investing in the Indian stock market.
What is Sensex?
As such, Sensex refers to an abbreviated index sensitive to the sense. Sensitivity in this regard is applied to the sense to which market movements are responded to by the index. This is arguably India’s oldest stock exchange and indeed its leading benchmark-the Bombay Stock Exchange (BSE). Launched first in 1986, it represents the 30 largest and most actively traded stocks listed on the BSE.
Few things that need to be discussed with Sensex:
30 Major Companies:
Sensex consists of 30 companies from various industrial sectors, such as IT, finance, energy, automobile, and consumer goods. The two major players in the Sensex are Infosys, HDFC Ltd., followed by ICICI Bank and Bajaj Finance amongst others from the big players in the market. These are termed bellwethers as they generally suggest the performance of the Indian economy, in general, in terms of market behavior.
Price-Weighted Index:
Where-as Nifty 50 is a market-capitalization-weighted index, the Sensex is a price-weighted index. In a price-weighted index, each stock in the index carries a weight based on its price. The more expensive the stocks the higher the weight and its influence over the movement of the index. This implies that the high price or value stock such as that of Reliance Industries, with a vast movement is going to have much more influence on Sensex than that which an equivalent movement might show in the case of a lower-share-priced stock.
This is the most important index to BSE and Sensex is widely regarded as India’s barometer of economy. Many mutual fund products take recourse to measuring their portfolio.
Nifty 50 vs. Sensex: What are the principal differences?
Though both Nifty 50 and Sensex are two important barometers of how the nation is performing in the Indian stock market, yet they have some differences between them.
1. Number of Stocks :
Nifty 50: It comprises 50 stocks.
Sensex: It comprises 30 stocks.
2. Stock Exchange :
Nifty 50: Stock trades on the National Stock Exchange (NSE).
Sensex: Stocks trade on the Bombay Stock Exchange (BSE).
3. Weighting Method:
Nifty 50: The index uses market-capitalization for weighting it.
Sensex: Price-weighted index.
4. Sectoral Exposure:
Though both indices are diversified across the sectors, Nifty 50 with broader outreach by having 50 stocks provides marginally better picture of the overall market whereas Sensex, being based on 30 stocks provides a narrower exposure.
Why Are Nifty 50 and Sensex Helpful to an Investor?
In fact, for a new investor, the Nifty 50 and Sensex become an excellent reference point to check out the health of the stock market as a whole. Here is how they help.
1. Market Benchmark:
Nifty 50 and Sensex will be benchmarks by which the individual stocks or mutual fund investments or a portfolio can be evaluated. If your investments perform worse compared with these indices over time then it could mean that your investments are not working out so well as the market average.
2. Investment Strategy
Both the Nifty 50 and Sensex are marking references for the investors who are building a diversified portfolio. Lately, an investment in the index fund or ETF following these indices can expose you to a wide set of companies and thereby reduce the risk associated with investments in individual stocks.
3. Market Sentiment:
Nifty 50 and Sensex provide an overall feel of the market sentiment. If indices are moving upwards steadily, it tells that there is a bullish market sentiment, whereas if indices are moving downward then it shows the bearish situation prevailing in the market. This gives an investor right cues for entering and exiting the market.
4. Tracking Economic Developments:
Considering that these are a bakery of companies from different sectors, the overall movement in them will indicate the economic conditions of the country. In many instances when moving indices show increases to a wide extent there are indications that there is expansion in the economy and corporate earnings are good, that is, the investors are optimistic. On the other hand, there is caution advance with declining indices and there is a prediction of problems for the economy.
Nifty 50 and Sensex are above everything else, excessive when not relevant in understanding the Indian stock market, if at all the new investor is let’s say spoon fed only Nifty 50 and Sensex. Nifty 50 consists of the top 50 companies published on its own national stock exchange (NSE) based on market capitalization while Sensex tracks 30 index of leading companies on the Bombay stock exchange (BSE). Like the two comic strips, they serve the same purpose of updating the recent happenings, as well as strain benchmarking measurement over the performance of one’s individual investment.
They understand that you are a fresher in this field, and hence, would help you in the right decision making as far as equities or equity mutual funds or ETFs that track these indices are concerned. Following the Nifty 50 and the Sensex would allow you to know the Indian economy’s pulse and to tweak your investments accordingly.