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Home Articles What is Sensex and Nifty? How is it Calculated?

What is Sensex and Nifty? How is it Calculated?

IndianMoney.com Research Team | Updated On Thursday, May 09,2019, 03:37 PM

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What is Sensex and Nifty? How is it Calculated?

 

 

Introduction to Sensex And Nifty

Stock market is a place where majority of people are interested in. We have got thousands of queries related to Index calculation (Sensex & NIFTY). In this article we explained clearly about the calculation of Index. Earlier we have published a number of articles related to stock market and we are very happy to know that you are benefitted with that information. Stock market is a place where you can make huge money. At the same time the possibility of losing money is also very high. Before trading you should have a clear idea about the market like how it works, how trading is done, what are the factors to be considered while trading, etc. In our previous articles we have given all such information. This article will help you to understand about the free float market capitalisation and Index calculation technique.

Stock is the smallest unit of ownership of a company in other words stock is a share in the ownership of the company. Stock is also called as share and equity. If a person purchases stocks of a company it means that he is one of the owners of the company, and ownership increases as he goes on purchasing more amount of stocks. Technically speaking a shareholder of a company owns a small part of every assets of the company such as building, furniture, trademarks, etc. A share holder holds ownership in all tangible and intangible assets of the company.

Investing in stock market is a very popular option among young investors. Stock markets have the potential of offering high returns over a short period of time. Stock markets can also bring down your investment to zero in no time, if the stock markets are taken lightly or casually. You shouldn’t invest in stock markets if you don’t have the knowledge on how they work. It is as good as gambling or speculation or trying your luck if you invest without knowledge.

A stock is defined as the smallest unit of ownership of a listed company. By purchasing stocks of a company, you become one of the owners of the company. The percentage of stake you hold in a company directly depends on the number of equity shares you hold. Your ownership of the company increases with the increase in number of shares you hold. A shareholder partially owns each and every tangible and intangible asset of the company.

A stock exchange is a facility in which stock brokers and traders buy and sell securities like shares, bonds and other financial instruments. Stock exchanges are a continuous auction market, in which buyers and sellers transact. Most stock exchanges today are digitized and offer an online platform for trading purposes. A company must be listed on a stock exchange for its securities to be traded.

National Stock Exchange NSE, and Bombay Stock Exchange BSE, is the most popular stock exchanges in India. BSE was established in 1875 and is located in Mumbai. BSE is Asia’s oldest stock exchange. BSE is world’s 10th largest stock exchange with a market capitalization of USD 2.3 trillion.

NSE was established in 1992 and is the country’s first demutualized electronic exchange. NSE is located in Mumbai, the financial capital of India. NSE has a market capitalization of USD 2.27 trillion.

What Is Sensex And Nifty?

The Sensex is a free float market index of 30 well established and financially strong companies that are listed on the Bombay Stock Exchange, BSE.

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 50 companies across 12 sectors.

History of Sensex

The BSE Sensex is also referred to as S&P Bombay Stock Exchange Sensitive Index or just Sensex. Sensex was introduced on 1st April 1979. Sensex is referred to as the pulse of the Indian stock market. The base value of Sensex was taken as 100 at the time of introduction. In July 2001, the BSE launched Dollex 30, the dollar linked version of Sensex.

As per the latest data, full market capitalization of Sensex is USD 760 billion and free float market capitalization is USD 419 billion. The highest value that Sensex has struck so far is 39,989.65 on 29th August 2018.

Below table shows the biggest single day gains of Sensex:

Date

Points

18-May-09

2,110.79 points

25-Jan-08

1,139.92 points

25-Mar-08

928 points

14-Nov-07

893.58 points

23-Oct-07

878.85 points

23-Jan-08

864.13 points

23-Jul-08

838.08 points

31-Oct-08

743.55 points

4-May-09

731 points

Below table shows the biggest slumps of Sensex in a single day:

Date

Points

28-Apr-92

570

17-May-04

565

15-May-06

463

18-May-06

826

19-May-06

453

22-May-06

457

2-Apr-07

617

1-Aug-07

615

16-Aug-07

642.7

17-Oct-07

717.43

21-Nov-07

678.18

17-Dec-07

769.48

18-Jan-08

687.82

21-Jan-08

1,408.35

22-Jan-08

875

11-Feb-08

833.98

3-Mar-08

900.84

13-Mar-08

770.63

17-Mar-08

951.03

31-Mar-08

726.85

27-Jun-08

600

15-Sep-08

710

6-Oct-08

724.62

10-Oct-08

792.17

24-Oct-08

704

7-Jan-09

749.05

6-Jul-09

869.65

17-Aug-09

626.71

12-Nov-10

432

16-Nov-10

444.55

4-Feb-11

441.92

24-Feb-11

545.92

22-Sep-11

704

27-Feb-12

477.82

13-May-13

430.65

31-May-13

455.1

20-Jun-13

526.41

6-Aug-13

449.22

16-Aug-13

769.41

27-Aug-13

590.05

3-Sep-13

651.47

18-Nov-13

451.32

8-Jul-14

517.97

16-Dec-14

538.12

6-Jan-15

854.86

30-Jan-15

498.82

9-Feb-15

490.52

9-Mar-15

604.17

26-Mar-15

654.25

5-May-15

722

24-Aug-15

1,624.51

22-Sep-15

541.14

4-Jan-16

537.55

7-Jan-16

554.5

11-Feb-16

807.07

11-Nov-16

698.86

2-Feb-18

839.91

4-Oct-18

806.47

5-Oct-18

800.51

History Of Nifty

National Stock Exchange’s Nifty50 is a popular stock index in India. It was launched on 1st April 1996. Nifty50 is reported be the World’s most actively traded contract. The base value of Nifty50 is set at 1000 and a base capital of Rs 2.06 trillion. Nifty50 all time high is recorded at 11760 on AUG 28 2018.

Below mentioned table shows the biggest slumps in Nifty50:

Date

Points

28-Oct-97

8%

21-Jan-08

10%

16-Aug-13

234.4 Points

24-Aug-15

490.9 Points

24-Jun-16

181.5 Points

11-Nov-16

229.45 Points

2-Feb-18

256.30 Points

24-Sep-18

175.55 Points

4-Oct-18

303.20 Points

5-Oct-18

282.80 Points


How Sensex Is Calculated?

Initially, Sensex used weighted market capitalization methodology. The methodology was changed to free float market capitalization in 2003.

Steps to calculate Sensex:

1) Sensex comprises of the stocks of 30 different companies. These companies are selected based on various criteria.

2) Market capitalization of these 30 companies is determined.

3) Free float market capitalization of these companies is determined. The market capitalization is multiplied with the free float factor to determine the free float market capitalization.

4) Free float market capitalization of all the 30 companies are summed up to arrive at total free float market capitalization.

5) Formula to calculate Sensex is as mentioned below:

Sensex = (total free-float market capitalization/ Base market capitalization) * Base index value.

6) The base year to consider for calculating Sensex is 1978-79.

Below mentioned companies constitute Sensex:

Asian Paints

Axis Bank

Bajaj Auto

Bajaj Finance

Bharti Airtel

Coal India

HDFC Bank

HCL Technologies

Hero MotoCorp

Hindustan Unilever

Housing Development Finance Corporation

ICICI Bank

IndusInd Bank

Infosys

ITC

Kotak Mahindra Bank

Larsen & Toubro

Mahindra & Mahindra

Maruti Suzuki

NTPC

Oil and Natural Gas Corporation

Power Grid Corporation of India

Reliance Industries

State Bank of India

Sun Pharmaceutical

Tata Consultancy Services

Tata Motors

Tata Motors DVR

Tata Steel

Vedanta

Yes Bank

Nifty is an index that is based on the market capitalization. Nifty consists of market capitalization of companies weighted by its effect over the index. Therefore, the company with higher market capitalization will have more effect on the index when compared to a smaller company.

How Nifty Is Calculated?

Formula to calculate Nifty is as shown below:

Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)

List of companies constituting Nifty50:

Company Name

Adani Ports & SEZ Limited

Asian Paints Ltd

Axis Bank

Bajaj Auto

Bajaj Finance

Bajaj Finserv

Bharti Airtel

Bharti Infratel Ltd.

BPCL

Cipla

Coal India

Dr. Reddy's Laboratories

Eicher Motors

GAIL

Grasim Industries

HCL Technologies

HDFC

HDFC Bank

Hero MotoCorp

Hindalco Industries

Hindustan Unilever

HPCL

ICICI Bank

Indiabulls Housing Finance

IndusInd Bank

Infosys

IOC

ITC Limited

JSW Steel

Kotak Mahindra Bank

Larsen & Toubro

Mahindra & Mahindra

Maruti Suzuki

NTPC Limited

ONGC

PowerGrid Corporation of India

Reliance Industries

State Bank of India

Sun Pharmaceutical

Tata Consultancy Services

Tata Motors

Tata Steel

Tech Mahindra

Titan Company

UltraTech Cement

United Phosphorus Limited

Vedanta

Wipro

Yes Bank

Zee Entertainment Enterprises

Sensex is an index of BSE while Nifty is an index of NSE. Nifty is more diversified than Sensex as it is comprised of stocks of 50 companies while the latter is of 30 companies.

Difference Between Sensex And Nifty

What is Sensex and Nifty?

Initially stocks were represented by share certificates which worked as the proof of ownership of the company but now it is dematerialized and every trading transaction happens through computer using DEMAT accounts. There are many stock exchanges in our country like BSE, NSE, Calcutta stock exchange, Bangalore Stock Exchange, etc. But NSE and BSE are major among them most of the stocks are traded in these two Exchanges.

SENSEX Meaning

Sensex stands for “sensitive index”, it represents BSE (Bombay Stock Exchange). Sensex indicates all major companies of BSE. Sensex is calculated using share prices of 30 major companies which are listed in BSE. If the Sensex goes up it means that share values of most of the major companies have gone up and vice versa.

See Also: Sensex Historical Data

NIFTY Meaning

Nifty indicates NSE; it is the leading index for large companies in the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy. NIFTY represents approximately 47% of the traded value of all stocks on the National Stock Exchange. It is calculated using base year 1995 and base index value 1000.

Criteria for selecting stocks to calculate Index

Below given are the criteria for selecting stocks to calculate Index

  • Listing history : The Company should have listing history on BSE for at least one year
  • Track record : company should have good track record.
  • Market capitalization : Company should be one among 100 market capitalizations of BSE, and each company should have more than 0.5% of total market capitalization of BSE index.
  • Frequency of trading : company stocks should be traded on each and every trading day for the last one year.
  • Industrial representation : company should be a leader in the industry it represents.

Market capitalization is the total worth of all outstanding (issued) shares of a company. It represents the total worth of a company.

Market capitalization= No of shares outstanding x market price of share

Free Float Market Capitalization

Free float concept is an index construction methodology which makes use of free float shares in the market. Free float market capitalization is the total worth of all shares of a company which are available for trading in the open market. These shares are called free float shares and are available for trading by anyone.

See Also: How does stock market work?

Example: Company ‘X’ issues 1000 shares, out of which 200 shares held by government, 500 shares by directors of the company and remaining 300 shares are available in the open market for trading. Market price of share is 10 Rs.

Here;

Total Shares = 1000
Shares Held by Government = 200
Shares Held by Directors = 500
Shares available in the Open Market = 300
Market price of share = 10

Here total market capitalization of the company is 1000 X 10 = 10000 and
Free float market capitalization of the company is 300 X 10 = 3000

According to the rules of BSE any shares which do not fall under the following categories are considered as free float (open market) shares.

  • Government holding shares as promoters
  • Holdings by Directors/ Founders
  • Holdings through the FDI route
  • Stakes held by private corporate bodies or individuals.
  • Any cross holdings i.e. equity held by associate or group companies.
  • Equity held by employee welfare trust.

Calculation of the free float factors

Periodically, every listed company has to submit holdings information i.e. who all are holding the shares of the company, to the exchange. Based on this free float factor for each company is calculated.

Free float factor = No of shares available for trading in the open market / Total No of outstanding shares of the company.

Free float factor of each company has to be rounded of to the higher multiple of 5 and company is considered among one of the free float range.

Free Float ranges

% Free-Float

Free-Float Factor

% Free-Float

Free-Float Factor

>0 – 5%

0.05

>50 – 55%

0.55

>5 – 10%

0.1

>55 – 60%

0.6

>10 – 15%

0.15

>60 – 65%

0.65

>15 – 20%

0.2

>65 – 70%

0.7

>20 – 25%

0.25

>70 – 75%

0.75

>25 – 30%

0.3

>75 – 80%

0.8

>30 – 35%

0.35

>80 – 85%

0.85

>35 – 40%

0.4

>85 – 90%

0.9

>40 – 45%

0.45

>90 – 95%

0.95

>45 – 50%

0.5

>95 – 100%

1

Calculation of SENSEX and NIFTY

Sensex calculation is practiced since 1986. Initially it had been calculated using total market capitalization method but the methodology changed to free float market capitalization since from 2003. Hence these days Sensex is calculated using free float market capitalization of 30 major BSE listed companies and by using base value 100 (1978-79). SENSEX is calculated for every 15 seconds.

Formula for Sensex

SENSEX = (sum of free float market cap of 30 major companies of BSE) X Index value in 1978-79 / Market cap value in 1978-79.

Example: suppose BSE index (SENSEX) consist of only two stocks such as ‘X’ and ‘Y’

Company ‘X’ has 1000 outstanding shares out of which only 500 are available for trading in open market. Market price of share is Rs.100.

Company ‘Y’ has 2000 outstanding shares out of which 1000 shares are held by promoters and remaining 1000 are free float shares (open market shares). Market price of share is Rs.50.

Calculation of Market Capitalization

Stock

Issued Stocks

Issued Stocks

Market Cap.

X

1000

100

100000

Y

2000

50

100000

Calculation of Free Float market capitalization

Stock

Open Market Stocks

Issued Stocks

Market Cap.

X

500

100

50000

Y

1000

50

50000

Here;
Sum of free float market cap of company X and company Y is 50000+50000 = 100000 Assume market cap during 1978-79 is 25000

Now Apply formula;

100000*100/25000 = 400

The same method is used to calculate NSE nifty but includes two major changes.

  • Base year is 1995 and base value (index value) is 1000
  • Nifty represents stocks of 50 major companies of NSE.

Formula for NIFTY

NIFTY = (Sum of free flow market cap of 50 major stocks of NSE) X Index value in 1995 / market cap value in 1995.

This article is specially prepared by considering our viewers request. Lakhs of people are trading in the stock market but majority of them didn’t know that how index is calculated. We believe that this article had helped you to make a clear idea about index calculation and related issues. For any queries related to this topic kindly contact IndianMoney.com or drop a comment in the comment box.

 

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