Role of NIFTY and SENSEX in the stock market

Last Updated on June 30, 2025 – by Lubhanshi Lamba

Before getting into complex terms like Nifty, Sensex, Index, and fluctuations, let’s understand the basics of the stock market. It is a broad network where investors can sell and buy shares in publicly traded companies. A stock market index is a tool that measures the performance of respective stocks and acts as the benchmark for the overall stock market. Nifty and Sensex are types of stock market indices that serve as evaluators to identify the performance of companies in the stock market.

Nifty and Sensex play an essential role in stock market dynamics. Both indices share similarities in various aspects but we need to understand the differences to make an informed decision. Nifty and Sensex act as a benchmark for investors to understand market trends and trade in the stock market. Before delving into the complexities of features and calculations. Let’s start with the basics of Nifty and Sensex, and then work our way upwards. We will delve into the information about Nifty live updates and Selsex live updates to stay ahead of current trends.

What is Nifty? 

Nifty 50 is the full name of this stock market index. It is like a scorecard of the top 50 companies listed on the National Security Exchange. It tracks the performance of shares in the stock market of these 50 companies. It was “come to life” by NSE on April 22, 1996, to provide a detailed representation of equity shares’ performance in the market. 

How to Calculate Nifty?

It uses a “Free Float Market Capitalization Method” to calculate the overall index value of the stock market. Let’s break down this complex method for easy understanding. There are various kinds of companies under Nify that include big players and small agencies. It calculates the “free float market value” of each company by using the following formula:

Market Cap = Share Price × Total Number of Shares

• Free Float means including the Shares that people like you and me can buy and sell — not the ones locked with the government, promoters, etc

Free-float market Capitalisation = Market capitalisation x IWF 

• IWF: Investable Weight Factor 

Finally, you can calculate the index value of Nifty 50 with:

Nifty = (Total Free-Float Market Cap of 50 Companies ÷ Base Market Cap) × 1000

• The base market cap is a fixed number from 1995, which is 1,000.
• The base market capitalization of Nifty is Rs 2.06 trillion.

What is the Sensex?

The Sensex is another vital stock market index that determines the performance of 30 companies listed on the Bombay Stock Exchange (BSE). Introduced on January 2, 1986, the Sensex helps in analysing the net performance of the stock market. These 30 companies are selected through a rigorous process to help you make an informed trading decision. 

How to Calculate Sensex? 

Similar to the Nifty 50, the Sensex also employs the free-float market capitalization technique to calculate its value. This reflects the total numeric value of 30 countries in the stock market about its base period of 1978-79. 

Free-Float Market Cap = Share Price × Free-Float Shares

• Free Float value does not include the shares accessible to directors, promoters, etc. 

Index Value = Free-float Market Capitalisation / Index Divisor

• Index divisor value refers to the market base value i.e, 100. 

Difference Between Nifty and Sensex

Understanding of NSE and BSE

NSE (National Stock Exchange)

National Security Exchange (NSE) was established in 1994 by the Indian government to bring transparency to the Indian stock market. This was the first stock exchange company introduced in India to offer electronic trading facilities. Now, this top financial exchange is headquartered in Mumbai and is owned by financial institutions, including banks and insurance companies. NSE is the fifth largest market capitalization in the world with a value of over $5 trillion as of May 2024. This financial platform allows investors and institutions to trade shares of publicly listed companies safely. 

BSE (Bombay Stock Exchange)

The Bombay Stock Exchange (BSE) was established in 1875 in Mumbai and it is an old stock exchange of Asia. It provides a platform for investors to buy and sell shares. It is one of the largest securities markets that has a collection of over 6000 companies and is headed by Sundararaman Ramamurthy (Managing Director & CEO). It has made significant efforts in shaping the Indian capital market and offers advanced trading services, including investor education, risk management, clearing, and settlement. SEBI regulates it and promotes an electronic trading system via brokerage. Investors can deal in various financial assets like stocks, mutual funds, and other securities. 

How do NSE and BSE work?

There are a few similarities between the functioning of NSE and BSE. Let’s delve into the workings of these stock exchange to understand better.

Working of NSE

• Facilitating Trade: The NSE operates a digital platform for trading securities. It allows investors and institutions to buy or sell shares on the NSE easily. It bridges the gap between technology and the trading process.
• Price Discovery: This stock exchange offers a space for a fair price discovery process. It matches the buy and sell orders to showcase the actual market value of the securities.
• Indices Management: This high-tech platform maintains significant benchmark indices like the Nifty 50 which tracks the performance of listed companies across various sectors. It also serves as the necessary tool for investors and analysts to gauge market trends. 

Working of BSE 

• Market Price Formation: This stock exchange helps in the fair determination of security prices via an advanced electronic trading system. It adds value to the securities and matches the trades. These transparent mechanisms include indices like SenSex which facilitate the easy tracking of benchmark prices. 
• Economic Contribution: BSE offers a trading space that facilitates continuous investment and disinvestment in economy. This process offers potential to boost it by capital formation and continuous fund movement. 

• Regulatory Practices: This stock exchange operates under the SEBI to ensure transparent trade activities. It follows the strict policies of the official framework to prevent market manipulation.  

Stock Market Index and Its Types 

We have heard of famous stock market indices like the Nifty and Sensex. Let’s understand what they are from the start. The market index is a selection of investments that reflects the current state of the financial market. Its calculation is based on the listed investments derived from market cap weighting, revenue weighting, float weighting, and fundamental weighting. 

In simple terms, a stock market index is like a scorecard for the performance of the financial market. It focuses on tracking the stocks of selected publicly listed companies and showcases the fluctuations in their prices. If the index rises, it typically indicates that most of those companies are performing well. If it goes down, they might not be doing so great.

Types of Stock Market Index 

1. Benchmark Index: Market indexes typically serve as a benchmark for the prices of securities. For example, the Nifty 50 is a collection of the top 50 best equities, and the Sesex includes the 30 top-performing stocks as indicators for the NSE and BSE, respectively. This selection of shares from publicly traded companies regulates the price in financial markets and helps investors select the right company to invest in. 
2. Broad Market Index: As the name suggests, this type of index encompasses hundreds of companies to represent the broader financial performance of the stock market. It employs publicly listed enterprises from various sectors, including banking, IT, and pharma to look at the bigger picture. 
3. Sectoral Index: Publicly traded companies on the stock market are categorized into various sectors, including banking, healthcare, and others. BSE and NSE display indicators for companies like S&P BSE, which belongs to the healthcare sector. These special indicators are sectoral indices that indicate the performance of companies within a specific industry. 

Factors that Affect the Performance of the Stock Market Index 

1. Economic Indicators 

These are the numerical statistics or data points that influence the change in prices in the stock market. These indicators reflect the overall performance of the economy in the current time. Some significant economic indicators are: 

• GDP growth
• Inflation rate 
• Unemployment rate 

Strong GDP growth, coupled with a low unemployment rate, leads to improved performance of the stock exchange index. This happens because customer spending and businesses tend to prosper, leading to profits for publicly listed companies. 

2. Inflation and Interest Rates 

Inflation refers to the rise in the prices of goods and services over time within an economy. Inflation leads to lower customer spending and a reduction in the value of money. 

Inflation’s influence on the stock market index 

• High inflation reduces consumer spending, which in turn affects company profits and stock prices.
• It often leads to higher interest rates and makes borrowing expensive with slow market growth.

Interest rates are set by the Reserve Bank of India as it is the apex bank of this country. These interest rates affect the borrowing cost for businesses and individuals. This eventually influences the profitability of the businesses’ purchasing power from customers. For Example, high interest rate dampens customer spending and lead to lower company profits over time. 

Interest Rate Influence on the Stock Market Index

• Rising interest rates increase borrowing costs for companies. It leads to a reduction in their profits and stock prices.
• Higher rates make fixed-income investments more attractive. It pulls the money away from the stock market.

3. Corporate Earnings 

Corporate earnings are the key driver of stock prices as they reflect the overall profitability of a publicly traded company.  Strong corporate performance raises the hope for future profits in the mind of investors, which boosts the cost of stock prices in the financial markets. The increased buying activity drives the growth of the market index or vice versa. 

4. Exchange Rates 

First, let’s understand the basics of exchange rates. It represents the current value of a currency relative to another. It influences the profitability of companies and the revenue generation in various countries. For example, when the indian rupee weakens against foreign currencies, companies that import goods face higher costs and a reduction in profit which negatively impact their stock prices. 

5. Global Events 

Global events can significantly create a sense of uncertainty in the financial market with the following types. Nifty and Sensex value is also influenced by these international events.

• Trade Tensions
• Country Conflicts 
• Natural disasters
• Economic Crisis
• Other Political Issues 

Negative global events create a sense of caution in the economy and lead to stock market decline in the long run. However, positive political developments can boost investor confidence in the stocks and lead to market gains.  

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