The stock market has many participants, including companies, investors, and regulators. One of the most important aspects of the stock market is the stock index, a statistical indicator that tracks the performance of a particular group of stocks. The two most well-known stock indices in India are the Sensex and the Nifty.
The Sensex, also referred to as the S&P BSE Sensex, is the stock index for the Bombay Stock Exchange (BSE). It was first introduced in 1986 and is now one of India’s oldest and most widely used indices. The Sensex tracks the top 30 companies listed on the BSE in terms of market capitalization.
Also read: Bombay Stock Exchange.
The National Stock Exchange (NSE) uses the Nifty, also called the Nifty 50, as its stock index. It was founded in 1996 and now has 50 firms listed on the NSE, as measured by market capitalization. The Nifty’s purpose is to represent the performance of the Indian stock market as a whole.
Both the Sensex and the Nifty are built using the market capitalization of the companies that comprise the index. By dividing the share price at the time of calculation by the total number of outstanding shares, one can calculate a company’s market capitalization. The market capitalization of a company affects how much weight it has in the index.
Also read: Best ETFs to Invest in in India
The prices of the stocks that make up the index are used to determine the real-time values of the Sensex and Nifty during trading hours. Since these indices provide a snapshot of the state of the stock market as a whole, investors closely monitor their changes. A rising Sensex or Nifty is regarded as a positive economic sign, whereas a falling index may herald a future downturn.
The Sensex and Nifty provide a wide overview of the stock market in addition to serving as benchmarks for mutual funds and other investment products. Many mutual funds and exchange-traded funds (ETFs) track the performance of these indices, providing investors with a way to access the Indian stock market.
Also read: “What is the S&P 500?”
Both the Sensex and Nifty use a free-float market capitalization-weighted formula to determine their respective indices. This means that to establish a firm’s weight in the index, the market capitalization of each stock included in the index is multiplied by its free-float factor (the proportion of shares accessible for trading on the market).
To make sure that the composition of the Sensex and Nifty accurately reflects larger market trends, they are routinely examined. A number of requirements must be satisfied before a firm may be added to the indices that the BSE and NSE maintain. If a company doesn’t meet these requirements, it is excluded from the indices.
Past performance: Throughout time, investors have received outstanding returns from both the Sensex and the Nifty. But there have also been times of uncertainty and change. For instance, the Sensex has generated an average annual return of about 14% since its inception in 1986. The Nifty, in contrast, has generated an average return of nearly 11% since its beginning in 1996.
Market Impact: Changes to the Sensex and Nifty can have a big impact on the entire stock market. A rising index may stimulate buying by boosting investor confidence, whereas a declining index may result in increased selling pressure. Foreign investors also keep a careful eye on the Sensex and Nifty, which are usually considered indices of the Indian economy.
Investor Benefits: There are several ways in which investors can gain from the Sensex and Nifty. They can give a brief overview of the stock market’s performance overall and by industry. Investors can also use them as a benchmark to assess the success of their mutual funds and portfolios. Investors may use these index changes as a tool to help them make decisions.
Sectoral Indices: The BSE and NSE both offer a number of sectoral indexes that track the performance of particular industries in addition to the Sensex and Nifty. The BSE, for instance, provides sectoral indices for industries including banking, healthcare, and information technology. These indices can give investors a more specialized perspective on market developments within particular industries.
Index Futures and Options: The derivatives market sees robust trading on the Sensex and Nifty. Investors can take positions on the market’s direction by trading futures and options contracts based on these indices. These derivatives contracts are suitable for speculative or hedging purposes.
Stock market turbulence: The Sensex and Nifty can fluctuate sharply and significantly in response to both local and international events. For instance, both indices had a steep decline at the start of 2020 as a result of investors selling off their assets in a panic following the COVID-19 pandemic outbreak. Changes in economic policy, natural disasters, and geopolitical conflicts can also have an impact on the market and the indices.
Investment Products: The Sensex and Nifty provide the foundation for a number of investment products. They include mutual funds, index funds, and exchange-traded funds (ETFs). Without needing to buy individual equities, these products give investors access to the Indian stock market. They can also offer cost-effectiveness and benefit from diversification.
Historical Milestones: Over the years, the Sensex and Nifty have attained a number of significant historical milestones. For instance, in 2017, the Nifty breached the 9,000 level while the Sensex first crossed the 30,000 mark. These landmarks demonstrate the expansion and improvement of the Indian stock market and economy.
Also read: India ETF List.
The largest ETFs with exposure to the Indian Stock Exchange are:
INDA: This ETF offers exposure to Indian equity markets, making INDA one of many ETF choices for investors looking to access an emerging market that maintains both tremendous growth potential and considerable volatility.
EPI: EPI offers exposure to Indian equities, weighting individual holdings by earnings instead of market capitalization.
The Sensex and Nifty are two of the most significant stock market indices in India, offering investors a glimpse of the performance of the whole stock market and specific sectors. They employ a free-float market capitalization-weighted methodology, and their representation of broad market trends is routinely checked.
Also, a number of investment products based on these indexes might offer cost-effectiveness and benefits for diversification. For investors trying to make wise investing choices in the Indian stock market, understanding these indices and their historical turning points might be helpful.