Business Original explainer
Two scoreboards, two baskets of India’s biggest companies — what the Sensex and Nifty numbers really measure, and what they leave out.
Turn on the business news and you will hear it within seconds: “Sensex up 400 points.” The number flashes on screen, the anchor sounds pleased or worried, and the bulletin moves on.
Those numbers do a narrower job than the headlines suggest. So what is Sensex and Nifty, in plain words? They are two scoreboards for the Indian stock market. Each follows a fixed basket of large companies and turns the combined movement of their share prices into a single number. When the number rises, that basket, taken together, has become more valuable.
The Sensex is the benchmark index of the Bombay Stock Exchange, or BSE. Its full name is the Sensitive Index, and it tracks 30 large, actively traded companies listed on the BSE, across banking, information technology, energy, consumer goods, automobiles and other major sectors.
Thirty is deliberately small. The Sensex picks a compact group of large, liquid companies, whose shares trade frequently and in large volumes, to give a quick read on the big end of the market. The list is reviewed regularly, and companies can enter or leave as their size and trading activity change.
First compiled in January 1986, it uses the financial year 1978–79 as its base, when the index was set at 100. That is why the number is so large today: it is not a price in rupees, but a measure of how much the basket’s value has grown since then.
The Nifty 50 is the benchmark index of the National Stock Exchange, or NSE. The name comes from “National Stock Exchange Fifty”: it tracks 50 large, liquid companies listed on the NSE, spread across the major sectors of the economy.
It is a broader basket than the Sensex, with 20 more companies, so it captures a slightly wider slice of large Indian business. Many of the biggest companies appear in both indices, because a large company is usually listed on both exchanges.
Launched on 22 April 1996, it uses 3 November 1995 as its base date, when the index was set at 1,000. That different starting point is the main reason the Nifty’s number is much smaller than the Sensex’s. Comparing their levels directly tells you nothing about which market is doing better.
Both indices use the same method: free-float market capitalisation weighting. Market capitalisation is a company’s share price multiplied by the number of shares it has issued. “Free-float” narrows that down: some shares are held by promoters, the government or other long-term holders who are unlikely to sell on the open market. Free-float counts only the shares genuinely available for public trading.
Each index adds up the free-float market value of all the companies in its basket and compares that total with the total on its base date, scaled so the base date equals 100 for the Sensex and 1,000 for the Nifty 50. In short, the index is the basket’s current free-float value expressed against where it started.
A company with a large free-float value also carries more weight, so a sharp rise in a heavyweight pulls the index up more than a similar rise in a small constituent. The Sensex moved to free-float weighting on 1 September 2003 and the Nifty 50 on 26 June 2009.
A point is simply the unit the index is measured in. It is not rupees, and it is not the price of any single share. “Sensex up 400 points” means the index number is 400 higher than at the previous close.
That is why the same number of points can mean very different things at different times. A 500-point rise is 2 per cent when the index stands at 25,000, but only about 0.67 per cent when it stands at 75,000. The points tell you the size of the move on the scale; the percentage tells you how big it is relative to where the index was.
The same logic applies across the two indices. A 500-point move in the Sensex and a 500-point move in the Nifty 50 are not equivalent, because the two sit at very different levels on different scales. Always look at the percentage change alongside the points.
On most days, the Sensex and the Nifty 50 move in the same direction. They share many of the same large companies and react to the same news about the economy, interest rates, company results and global markets. But they do not move identically: the Nifty has 20 companies the Sensex does not, and each company carries a different weight in each index. With only 30 members, a sharp move in one Sensex heavyweight can shift the Sensex a little more than it shifts the Nifty.
Neither index is the whole market. Thousands of companies are listed on the BSE and the NSE, including mid-sized and small companies in neither index. Those shares can fall sharply on a day when both indices are up. A record high is the same kind of partial story: it means the combined basket is at its highest level, not that every company in it is doing well. The headline number also tracks share prices, not the dividends companies pay.
Used properly, the Sensex and the Nifty are useful shorthand: two quick, consistent readings of how India’s largest listed companies are faring. The next time the anchor says the Sensex is up 400 points, the useful questions are by how much in percentage terms, which big companies moved it, and whether the rest of the market moved with it.
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