What is Nifty and Sensex？ Difference between Nifty and Sensex （ Nifty vs Sensex）

If you are just getting into stock trading and searching for the right ways to invest, you must have come across the terms "Nifty" and "Sensex". But before we explain what these terminologies mean, we will first have to develop a quick understanding of "index".

As you may already know that there are hundreds, sometimes even thousands, of stocks listed on the market. This makes it difficult for the experts to evaluate the price performance of each individual stock. That's where index value is used to determine the performance by choosing a sample of listed stocks that represent their respective sectors. This way it becomes much easier to monitor the trend of the stock exchange enabling investors and traders to make informed decisions.

Nifty and Sensex are respective indices of the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Stock day traders along with long-term investors rely on these indices to buy and sell their shares. Moreover, evaluating an index like the Nifty or Sensex can also help financial and economic experts to identify market trends and patterns which can be quite useful for the sector.

Nifty is the index of the National Stock Exchange which consists of a sample of 50 stocks to assess the market trend. The nifty full form is National Fifty as it contains a diverse variety of stocks from different industries including telecom, IT, automobile, financial services, consumer goods, and more. Any company's stock can qualify for Nifty if they meet the criteria of domicile, liquidity, and float adjustment.

Market capitalization is first calculated to determine the Nifty's value. The market capitalization is calculated by multiplying the capital by the current price. Thereafter, equity capital is multiplied by the value for determining free-float capitalization.

The resulting free-float market cap is then multiplied by the Investable Weight Factor (IWF) which is a measure of the marketability of a certain number of stock options. Note that 1,000 is used as the starting point for computing the Nifty. In order to calculate Nifty's regular index score, the existing market valuation is divided by the core capitalization and multiplied by the base price, which is 1,000.

Sensex full form is the Sensitive Index and it consists of 30 stocks from a variety of sectors. As there are over 6,000 companies listed on BSE, it wouldn't be possible for any investor or financial analyst to evaluate the individual performance of all stocks. The 30 companies included in Sensex provide a reasonable representation of the market trends and the result can be safely extrapolated for informed decision-making.

Unlike Nifty, companies have to satisfy more criteria to qualify for Sensex. These prerequisites include average daily revenue, high liquidity, market capitalization, industry representation, and trading frequency.

The free-float market valuation approach is used to compute the Sensex, which reflects the profitability of 30 business institutions. Using the free-float market capitalization technique, investors may see how many shares are available for trading and how many of those shares have been distributed to the public.

The market valuation of a business is derived by multiplying the value of its remaining shares by the Sensex index. To determine free-float market valuation, the free-flow coefficient must be used. Subsequently, the free-float market capitalization value is measured by the aggregate denominator of 100 to arrive at the Sensex index score. The Sensex index starts with a value of 100.

While both Nifty and Sensex are stock indices, they are different in many ways. Let's take a look at some of the most prominent differences:

●     Abbreviation & Stock Exchange - Sensex is a short form for Sensitive Index while Nifty stands for National Stock Exchange Fifty. Bombay Stock Exchange's (BSE) market trends are determined by Sensex but the Nifty is used to evaluate the performance of the National Stock Exchange (NSE).

●   Former Names & Incorporation - Sensex and Nifty were incorporated in 1986 and 1996 respectively. Sensex was formerly known as S&P BSE SENSEX while Nifty was called CNX FIFTY. As you might have noticed, the former terms were not simplified enough so the indices were eventually renamed.

●   Company & Sector Representation - With Sensex, you get a sample of 30 companies that represent 13 different industrial sectors. On the other hand, you have Nifty which indicates the performance of 50 companies across 24 industrial sectors.

●     Base Value & Liquidity - The base index value for Nifty is 1000 as opposed to Sensex which is calculated with the base index value of 100. When it comes to trading volume and overall market liquidity, the Nifty is considerably high as compared to the Sensex.

Since its very debut in 1996, the Nifty has seen a great deal of volatility as a result of the peculiarities of the equities market. There have been seasons in which the index almost halved in value and there have been periods in which the index rose by more than seventy percent. However, when viewed over a longer period of time, the index has shown tremendous growth. In fact, over the course of the last two decades, the index has generated an annualized yield of 13% on average.

As has been indicated previously, Nifty is comprised of the most successful businesses; thus, if you purchase Nifty, you will automatically become a shared owner of these exceptional businesses. There are currently two methods available for investing in Nifty.

First, you can directly purchase equities in the same proportion as their weighting in the Nifty index. The second way is to put money into index funds that follow the performance of the Nifty. These funds imitate Nifty which means that their portfolios are identical to those of the index. Consequently, a Nifty index fund includes the 50 companies in just the same ratio as Nifty, and all you have to do is put your money in.

Just like Nifty, you have two similar ways to invest in Sensex. If you put your money in Sensex, you will own a share of some of the highest-performing Indian companies. Here's what you can do:

●     This index's components and weightings may be used to make investments right away. This implies that you may acquire the stocks in an amount that is exactly proportional to the volume of the stock.

●     Investing in SENSEX using index funds is a superior strategy. These funds mimic the index, which means that they have the same holdings as the index. There will be 30 equities on the S&P Sensex equity fund, just as there are 30 companies on the index itself.

Regardless of the index, you are investing in, always learn about the fundamentals. For instance, you should make it a rule to only invest the money you have no immediate use for. Apart from that, it is a good idea to employ basic risk minimization strategies such as diversification. While your capital is already divided across dozens of stocks in an index, you can choose to invest in different indices to exercise more caution and hedge your bets.

There are quite a number of variables that contribute to the volatility of the Sensex and the Nifty indices.  To begin, the situation of the market on a worldwide scale has a significant bearing on indices. The success of the index suffers when there is an economic downturn going on in the world as a whole.

Apart from that, inflation has a detrimental impact on the effectiveness of indices because of the effect it has on prices. This is due to the fact that traders have a reduced amount of money available to invest in the shares of businesses as a result of inflation. In addition to this, businesses are negatively impacted by the financial difficulties in the economy, which leads to a decline in the value of the stock market.

Importantly, a decline in the financial markets tends to follow changes in interest rates because of the domino effect that this phenomenon has. The cost of borrowing money goes up if there is an uptrend in the policy rate. In order to cope with the reduction in the financing, businesses have to cut their costs, which further hinders the performance of the business on the stock exchange. This results in a decrease in the profitability of the index.

If you are a new investor, you need to keep in mind that the indices of the market serve as a barometer for the emotions of investors. They assist the traders in understanding the circumstances of the economy and provide the shareholders the ability to make logical judgments about their investments.

Whether you are a beginner investor or a seasoned trader, indices like the Nifty and Sensex provide a quick and convenient way to invest your disposable income that will otherwise lose value because of inflation. That being said, prior to investing, always do your homework and find out which indices are more suited to your investment goals and expectations.