All of us check the Nifty or Sensex to know how the stock market is performing. But do you know what is Nifty and Sensex?
Do you know why the Nifty and Sensex move up or down?
Do you when Nifty and Sensex were started and which companies they belong to?
Let’s get answers to the above questions and a lot more in this article.
What is Nifty?
The Nifty belongs to the National Stock Exchange (NSE), which is the biggest stock exchange in India.
The full form of Nifty is ‘National Fifty’. It’s also called as ‘Nifty 50’.
In other words, ‘Nifty’ is a stock market index which consists of 50 top companies from various sectors. It was first established in the year 1996.
What is Sensex?
The Sensex belongs to the Bombay Stock Exchange (BSE), which is the oldest stock exchange in the country.
The full form of Sensex is ‘Sensitive Index’. It consists of 30 top companies from various sectors.
The Sensex was first published in the year 1986 (i.e 34 years ago).
Difference between Nifty and Sensex
|Full Form||National Fifty||Sensitive Index|
|Composition||50 stocks||30 stocks|
|No of Sectors||24 sectors||12 sectors|
|Published Since||April 21st 1996||January 1st 1986|
|Base date||3rd November 1995||1st April 1979|
The starting value of Sensex was 100 and the calculation of the index was started from 1st April 1979. From 100, the Sensex has gone up more than 383 times in 41 years. The compounded returns are 15.61%.
The Nifty was started with 1000 points and the calculation began on 3rd November 1995. It has gone up more than 11 times in 25 years. The compounded returns are 10.19%.
Quite clearly, the Sensex has given better returns than Nifty, but it was also started 16 years earlier – during times when the country was still economically very backward.
What does it mean if Nifty and Sensex rise or fall?
If you have been following the stock market, you might have seen the ‘Nifty and Sensex’ rising or falling on a particular day.
If the Sensex falls, it means out of the 30 stocks in its index – major stocks have fallen, thereby bringing the Sensex down.
If the Sensex rises, it means major stocks have risen in value, taking the Sensex up.
The same applies to Nifty too.
On September 20 2019, the Indian Government announced a corporate tax cut – which would be hugely beneficial to major companies in the country.
The Nifty sky-rocketed on this day. It opened at 10,746 points in the morning and closed at 11,274. The gain from the previous day was 5.32%.
What took the Nifty up was the outstanding performance of some of its major stocks like Reliance Industries and HDFC Bank. Reliance was up 6.4%, HDFC Bank was up nearly 9%. Since these two companies have the highest weightage in Nifty, the indices (Nifty and Sensex) boomed.
Which brings us to the next question:
How is Nifty and Sensex calculated
Both Nifty and Sensex use the ‘free float market capitalization’ method.
Let’s break it down.
Market capitalization is ‘current share price’ multiplied by ‘total number of shares of a company’.
Free Float is ‘total shares of a company’ minus ‘shares not available for trading’.
Let’s take a simple example:
- Total number of shares of a company = 1000
- Shares not available for trading = 200
- Free Float = 800
- Free Float Market Capitalization = 800 x Current Share Price
You might be wondering why Nifty and Sensex consider ‘Free Float’ and not all the shares of a company.
The reason is, the shares that are not available for trading usually belong to the promoters (owners), management or employees of the company. These shares are locked-in and are not traded regularly.
For well-established companies, shares that promoters are not traded (sold or bought) for many years.
Whereas, shares that are bought by mutual funds or retail investors like you and me – are actively traded in the stock market.
Hence, the Nifty and Sensex – which are the two major stock indices of the country – only consider the ‘free float’ i.e shares that are freely available to be traded on the stock exchanges.
The ‘free float’ method removes companies that have only a small percentage of shares that can be freely traded in the market. This also helps in giving more weightage to companies that are market-driven.
Top 10 Companies with highest weightage in Nifty
|1.||Reliance Industries||13.63 %|
|2.||HDFC Bank||9.99 %|
|5.||ICICI Bank||5.62 %|
|6.||Tata Consultancy Services||4.9 %|
|7.||Kotak Mahindra Bank||4.24 %|
|8.||Hindustan Unilever Limited||3.91 %|
|10.||Bharti Airtel||2.55 %|
There is something very interesting in the table above. Tata Consultancy Services (TCS) is the 2nd most valued company in India in terms of market cap.
However, in the Nifty, it’s weightage is 6th highest.
Whereas, HDFC Bank has the 3rd highest market cap – but its weightage in Nifty is 2nd highest.
This means, HDFC Bank more than twice more important to the movement of Nifty than TCS.
This is because of the ‘free float market capitalization’ method.
72% of TCS shares are locked-in with its owners (Tata Group) – which means only 28% is freely available for trading in the stock market.
For HDFC Bank, only 26.1% is with the promoters. The rest 73.9% is with local mutual funds, foreign investors and individual investors. All of these can sell their shares at any time in the market – this means, the free float of HDFC Bank is much higher than TCS.
Hence, the weightage of HDFC Bank in Nifty and Sensex is higher than TCS.
For Reliance Industries, 50% of the shares are with Mukesh Ambani and his family – the remaining 50% can be openly traded in the market. This is what is called ‘free float’.
Hope the concept of ‘free float’ has been very clearly understood.
To sum it up, the next time you see the stock price of ‘Reliance Industries’ crash – it does the maximum damage to Nifty and Sensex. The same applies to rise. If Reliance performs extraordinarily well on a particular day, the chances of Nifty also performing very well is high.
Some interesting facts:
- The weightage of Bottom 22 companies is 13.31%, which is lower than the weightage of the biggest company Reliance Industries (13.63%). So, if all those companies fall by an average of 1% and Reliance gains by 1%, it’ll make no difference to Nifty – as Reliance alone has made up for the fall of all those 22 companies.
- The weightage of Top 10 companies in Nifty is 62%. It’s these 10 companies that have the maximum impact on the movement of Nifty.
- The weight of Top 20 companies in Nifty is 79%.
- The HDFC group has the biggest impact on Nifty as its 3 companies HDFC Bank, HDFC Ltd and HDFC life together have weightage of 17.4% in Nifty.
Note: All of the above mentioned facts are as of August 31st 2020. The weightage of Nifty changes when the stock price of the respective companies change.
What is Nifty and Sensex: Frequently asked questions
What are the 30 companies in Sensex?
The list of companies or stocks in Sensex are as follows:
|10||Hindustan Unilever Limited|
|15||Kotak Mahindra Bank|
|16||Larsen & Toubro|
|17||Mahindra & Mahindra|
|21||Oil and Natural Gas Corporation|
|22||Power Grid Corporation of India|
|23||Reliance Industries Limited|
|24||State Bank of India|
|27||Tata Consultancy Services|
What are the 50 companies in Nifty?
The list of companies or stocks in Nifty are as follows:
|9||Bharat Petroleum Corporation Ltd (BPCL)|
|13||Dr Reddys Laboratories|
|18||Housing Development Finance Corporation (HDFC)|
|20||HDFC Life Insurance|
|23||Hindustan Unilever Ltd (HUL)|
|27||Indian Oil Corporation (IOC)|
|30||Kotak Mahindra Bank|
|31||Larsen & Toubro|
|32||Mahindra and Mahindra (M&M)|
|36||Oil and Natural Gas Corporation (ONGC)|
|37||Power Grid Corporation of India|
|40||State Bank of India (SBI)|
|44||Tata Consultancy Services (TCS)|
|48||United Phosphorus Limited (UPL)|
What is the weightage of companies in Nifty 50?
The list of companies in Nifty 50 along with weightage is as follows:
|6||Tata Consultancy Services||4.90%|
|7||Kotak Mahindra Bank||4.24%|
|12||Larsen & Toubro||2.39%|
|14||Maruti Suzuki India||1.88%|
|16||State Bank Of India||1.68%|
|18||Mahindra & Mahindra||1.20%|
|21||Dr. Reddy’s Laboratories||1.07%|
|23||Power Grid Corp of India||0.95%|
|28||HDFC Life Insurance||0.86%|
|37||Oil And Natural Gas||0.62%|
|47||Indian Oil Corporation||0.45%|
Which is the oldest index in India?
The oldest index in India is the Sensex which was started in the year 1986. Its owner Bombay Stock Exchange is also the oldest stock exchange in the country. BSE was established in 1875. It’s also the oldest stock exchange in entire Asia.
Which stock has highest weightage in Nifty?
As on 31st August 2020, Reliance Industries has the highest weightage of 13.63% in Nifty. The second highest weightage of 9.99% goes to HDFC Bank. The third highest is Infosys with weightage of 7.03%.
How is Nifty weightage calculate?
The weightage of Nifty is calculated using the free-float market capitalization method. Free float is total number of shares minus ‘locked-in’ shares which usually belongs to owners, management and employees of the company. It’s the shares that can be freely traded in the open market.
Can I buy Nifty 50?
Yes, it is possible to buy the Nifty 50. You need a trading and demat account. You can then buy Nifty 50 index fund, also called as Nifty 50 ETF (Exchanged traded fund). These kind of funds have low charges as compared to mutual funds and the risk is lower too. The returns of Nifty 50 index funds will be identical to the returns of Nifty 50.
Why do we need Nifty and Sensex?
The reason is simple. There are so many companies listed in the stock market. On a particular day, it is impossible to tell how the market or a particular sector has performed – just by quoting individual stocks.
Hence, an index clubs together a group of companies – giving people an indication of how the entire market has performed. Nifty has risen means major companies have performed well at the stock market. You can quickly understand the performance of the market without looking at individual stocks.
In this article on ‘What is Nifty and Sensex’ we have tried to cover all the important details. In the ‘Frequently asked questions’ section, we have answered more questions from our readers.
If you still have any questions, please post them in the comments section below. We will make it a point to answer all questions.