Whenever you listen your colleagues, neighbors or news channels talking about the stock market going up or down, you may probably think how people can generalize the overall trend as there are lots of listed companies out there and at the same time, some are doing well and some are doing their worst.
Well, people generalize the market movement by the indices of stock market. Sensex and Nifty are the two major indices you may have heard being discussed everywhere on news channel, newspapers and magazines. You always listen business channels talking mostly about Sensex and Nifty while discussing economy, corporate earnings and growth trend. Perhaps, you must have seen the live feed showing Sensex and nifty numbers on the screen along with stock prices of different companies. Well, what are actually Sensex and Nifty and how the numbers keep changing and how they are calculated?
In India, there are two major stock exchanges, Bombay stock exchange (BSE) and National Stock exchange (NSE). Both stock exchanges work independently. Though there are 12 different stock exchanges available all over India so far (According to latest data of SEBI), BSE and NSE are the major stock exchanges of India. Companies who wants their shares to trade get listed on stock exchanges either BSE or NSE. There are certain criteria to meet to get listed on different stock exchanges.
BSE is the biggest stock exchange in India in terms of number of listed companies (Over 5000), while NSE is the biggest in terms of market capitalization (Market capitalization = No of issued shares*Current share price). Both Stock exchanges have numbers of indices, but the main indices among them are Sensex and Nifty. An index is nothing but a number that reflects the share prices of bunch of companies.
Sensex is the major index of BSE which cover or track 30 major companies listed on BSE. These 30 companies are having highest market capitalization among all the listed companies on BSE and represent different industries. So, Sensex get calculated by taking only 30 companies of BSE into account. Nifty is the major index of NSE which covers 50 major companies listed on NSE. These 50 companies are having highest market capitalization among all the listed companies on NSE and represent different industries.
Here are the links where you can find the complete details of thirty sensex and fifty nifty companies.
Sensex https://www.bseindia.com/sensex/code/16/
Nifty https://www.nseindia.com/products/content/equities/indices/nifty_50.htm
So, Sensex and Nifty reflect the large companies from almost all major sectors and industries of country and thus their movement can be generalized as overall market movement.
Now, you may wonder how Sensex and nifty are being calculated. The method of calculation of both the indices is same.
Calculation of Sensex:
Total free float market capitalization of all 30 companies is calculated first. Free float market capitalization is calculated as No of issued shares which are freely available in market to trade multiplied with Current share price. Free float generally excludes promoters' holding, government holding, strategic holding and other locked-in share from total issued shares.
Note: Consider company XYZ has 10,000 shares in total, of which 4,000 are held by the promoters, so that only 6,000 shares are available for trading to the general public. These 6,000 shares are the so-called 'free-floating' shares. If the price of each share is 150 rupees, then the 'total' market capitalization of the company is 15,00,000 rupees (10,000 x 150), but its free-float market capitalization is 9,00,000 rupees (6,000 x 150).
Now, the number we have got by adding all thirty companies free float market capitalization is get indexed with the total free float market capitalization of sensex companies in 1978-79 which is being considered as 100. Simply, If the total free float market capitalization of sensex companies in 1978-79 was 60,000 and would be considered as 100, then the total free float market capitalization of sensex companies today let’s say 1,80,00,000 would lead to a number 30,000. This is the value of sensex today. [1,80,00,000*(100/60,000)]
This method of calculation is called as free float market cap method. The indices of other stock exchanges of the world are not necessarily get calculated by the same method.
TRIVIA
Full form of sensex is sensitive index and that of Nifty is national fifty. Their official names are S&P BSE sensex and S&P CNX nifty respectively.