When financial news anchors report that "the market rose by 1% today," how do they know? There are over 5,000 companies listed on the Bombay Stock Exchange (BSE) and more than 2,000 on the National Stock Exchange (NSE). It is mathematically impossible to track every single stock to determine if the general market went up or down. Instead, we use **Stock Market Indices**. In this article, we explain the concept of indices and examine India’s two benchmark indices: **Sensex** and **Nifty 50**.
What is a Stock Index?
A stock index (plural: indices) is a statistical indicator that measures price changes in a selected group of representative stocks. Think of it as a sample thermometer. If you want to check if a big pot of soup is hot, you don't drink the whole pot; you taste a spoonful. An index is that spoonful. If the top companies in the index are doing well, it indicates the broader economy and stock market are healthy.
1. The BSE Sensex
The **Sensex**, short for "Sensitive Index," is the benchmark index of the Bombay Stock Exchange (BSE). It was created in 1986 and tracks the performance of **30 of the largest, most financially stable, and actively traded companies** listed on the BSE.
- Selection: These 30 companies represent various sectors of the economy (banking, IT, energy, automobile, pharmacy).
- History: Sensex’s base year is 1978-79, with a base index value of 100. If Sensex trades at 75,000 today, it means the value of its component stocks has grown 750 times over its base value.
2. The NSE Nifty 50
The **Nifty 50**, short for "National Index Fifty," is the benchmark index of the National Stock Exchange (NSE). Launched in 1996, it tracks the performance of **50 of the largest blue-chip Indian companies** listed on the NSE.
- Broad Representation: Because it tracks 50 stocks instead of 30, many institutional investors consider Nifty 50 a more comprehensive indicator of the Indian equity market.
- History: Nifty’s base year is 1995, with a base index value of 1,000.
How are Sensex and Nifty Calculated?
Both Nifty 50 and Sensex are calculated using the **Free-Float Market Capitalization** method. Here is how it works:
- Market Capitalization: The total market value of a company's outstanding shares (Share Price × Total Number of Shares).
- Free-Float: The shares of a company that are readily available for trading by the general public. It excludes shares locked up by promoters, founders, or the government.
- Calculation: Only the free-float market cap of the component companies is summed and divided by an index divisor (a number adjusted for corporate events like splits or bonuses) to yield the final index score. This ensures a company with massive locked promoter holdings cannot easily manipulate the index price.
Why this matters: Changes in the share prices of heavyweights like Reliance Industries or HDFC Bank impact the index value far more than smaller companies, reflecting their relative weight in the index.