What is Nifty and Sensex?- This is the question each curious person wants to know who has interest in share market. Both indices are part of stock exchanges in India which are considered benchmark for the performance of the stock market. Both these indices are very important tools to understand the overall condition of the Indian economy and the stock market. Both indices play important roles for investors, analysts and policy makers. There is a difference in between Nifty and Sensex composition, calculation and no. of the stocks yet the objective of both is the same. Let us know about them in detail, how they work and what is their role in the financial system of India.
What is Nifty?
Nifty is referred to as NIFTY 50. It is the benchmark index of National Stock Exchange. Nifty index has been formed by taking the 50 leading companies of the nation. They are from different sectors such as finance, IT, consumer apparel, energy, pharmaceuticals and automobiles. So it reflects the overall situation of the Indian stock market. NIFTY is derived on the free-float market capitalization basis. This implies the larger the market capitalization, the higher the impact on the index. Nifty covers only listed companies.
The performance of Nifty is a crucial sign to understand the real market scenario and sentiment of investors. It is carefully watched by fund managers, traders, and investors, and it serves as a benchmark to assess mutual fund and exchange-traded funds (ETF) performance.
What is Sensex or sensitive index?
Sensex is referred to as a sensitive index. It is a significant index of Bombay Stock Exchange. Sensex monitors the performance of the top 30 and most traded firms of the nation. Firms belonging to various sectors have been covered under this index. Sensex is computed in the same manner as Nifty. There is less liquidity compare to nifty because there are only 30 firms.
Important Differences Between Nifty and Sensex:
While both Indices measure the performance of the Indian stock market, there are some important differences between them:
| 1. Number of Constituents: | Nifty index includes fifty companies. | Sensex index includes thirty companies. |
| 2. Exchange Representation: | It represents the Indian National Stock Exchange (NSE). | It represents the Indian Bombay Stock Exchange (BSE). |
| 3. Market Capitalization: | Nifty has a broader representation of the Indian stock market due to it having more companies in its composition | while Sensex is relatively narrower. |
| 4. Liquidity: | The companies which are part of Nifty are generally more liquid, making it a better reflection of the liquidity of the overall market. | Since there are only 30 companies in the Sensex, it does not give a comprehensive picture of market movements as compared to nifty. |
Importance of Nifty and Sensex in the Indian Economy:
Nifty and Sensex are important indices of the Indian stock market and have a significant impact on the Indian economy. Both these indices have the following major significance:
1.Market Indicators: Both indices provide quick indication of the performance of the country’s economy and stock market. When the stock market goes up, it means that the economy is performing well and when the stock market goes down, it reflects the negative sentiment of investors and issues in the economy.
2.Benchmark for Investors: Foreign institutional investors (FIIs), Domestic institutional investors (DIIs), Banks, hedge funds used Nifty or Sensex as a benchmark index. Based on this they evaluate the performance of their portfolio. For example, if the performance of a mutual fund is better than Nifty then its investment strategy is excellent.
3.Economic Sentiment: Both indices are tracked by many economists and big investors. If there is any kind of issue in the country’s economy then the index reflects its negative sentiment with its bad performance. Both indices’ performance are influenced by many factors like fiscal policy, or GDP growth, monetary policy, political stability and corporate earnings.
4.Investment In index: Investors can use either ETFs to invest in the index or invest in the companies listed in the index through stock exchanges. Mutual Funds are good way for small retail investors because they don’t have enough money to invest in all fifty companies of Nifty 50.
Conclusion:
Nifty and Sensex are key indices to know and follow the Indian stock market. Both the indices are crucial to comprehend the direction of the Indian market, investor mood and the overall economic health. While there are certain differences between both these indices, both these indices are thought to be the prime drivers of the Indian market. Whether you are a trader, an investor or analyst, following Sensex and Nifty is absolutely crucial for Indian financial markets decision making.
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