Indian Indices – BSE Sensex and the S&P CNX Nifty

The BSE is the stock exchange that pioneered the stock brokerage activity in India in 1875. The stock market throughout its life since its inception has seen many ups and downs, but until 1986, there was no measure to quantify these ups and downs. It was then that the BSE Sensex was compiled in 1986. Trading on the NSE began in 1994. In 1998, NSE and CRISIL formed a JV called India Index Services & Products Ltd. (IISL), which was formed with the aim of concentrating on the formation and maintenance of only indices as a product of this JV. That’s when CNX Nifty was launched, where CNX stands for CRISIL NSE Indices. This index is owned by IISL. Later, Standard & Poor’s, owner of the S&P 500 index, endorsed the CNX Nifty and then it started to be called S&P CNX Nifty.

The meaning of BSE

SENSEX, first compiled in 1986, is an attempt to capture three features for one constituent.

Is it so

(1) size-

It has to be a big company,

(2) Liquidity-

It has to be a highly liquid stock and

(3) Representation-

The most prominent sectors, if not all, must figure among the constituents.

The Sensex consists of 30 stocks as an ideal portfolio and is calculated on a “weighted market capitalization” with the base year 1978-79. Originally, the Sensex was calculated on a full market capitalization, but was later changed to include only the company’s free-float market capitalization. Free float market capitalization is defined as the proportion of the company’s total issued shares that are readily available for trading in the market. It generally excludes developer participation, government participation, strategic participation, and other blocked shares that will not come to market for trading in the normal course. The level of the index at any time reflects the floating market value of 30 component stocks relative to the base period. The base value of SENSEX is 100 index points. The SENSEX calculation involves dividing the free float market capitalization of 30 companies in the index by a number called the index divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the set point for all Index adjustments arising from corporate actions, security replacement, etc. For the script to be part of the Sensex, it must be

1. Included in the BSE for at least three months.
2. Traded each and every day of the last three months
3. In the Top 100 companies listed by final ranking
4. Have a weighted age of at least 0.5% of the index based on three-month average free float market capitalization
5. On behalf of companies listed in the EEB universe and
6. have an acceptable track record

The nifty S&P CNX

The S&P CNX Nifty is a scientifically prepared index and has certain rules for scrip to be part of the index. These rules are very different in relation to the Sensex. After nearly a trillion calculations, it was found that the correct size of a wallet in India is 50 scrips. This is the basis of Nifty having 50 shares instead of 30 shares in Sensex. The main criterion for a stock to be part of this portfolio is the impact cost criterion. Impact cost, which means that the stock should have a minimal impact on the CMP of the vouchers, even when bought in a good quantity. The following is an example to explain the term “Impact Cost”. Suppose a stock is trading at a bid of 99 and an ask of 101. We say that the “ideal” price is 100 rupees. So we say that the market impact cost on 1000 shares is 2%. If a buy order for 2,000 shares is placed at Rs 104, we say that the market impact cost on 2,000 shares is 4%. Market shock cost is the best measure of a stock’s liquidity. It accurately reflects the costs you face when actually trading an index. For a stock to qualify for possible inclusion in the S&P CNX Nifty, it must have a reliable market impact cost of less than 0.75% when transacting S&P CNX Nifty of Rs 5 crore. Based on this, the 50 largest stocks that meet this criteria make up Nifty.

Ultimately, therefore, both indices have their own importance and their own construction ideologies. However, both with their own ideologies have had very little chance of a different opinion on the health of the market in general. These two indicators are broad market indicators. There are also specific indices available by sector, market capitalization, etc., which give a closer and more precise indication.