What are Sensex and Nifty

The NSE (National Stock Exchange) & the BSE (Bombay Stock Exchange) are two major stock exchanges in India. The Stock Exchange is a market where a deal is made between the buyers and sellers of the shares which are listed on the Exchanges. Both the Nifty and Sensex are indices. Sensex is the main index of the Bombay Stock Exchange while Nifty is the National Stock Exchanges' main index. Around 5400 are listed on the Bombay Stock Exchange and more than 2000 companies are listed on the National Stock Exchange.

As there are lots of listed companies on the exchange so, it's quite difficult to track these companies to know the market's condition and that's why the index has been formed. You don't need to track all the companies in India to know the situations of a few companies, you can figure out whether the market is up or down only by observing the Nifty & Sensex,. When the Sensex or Nifty is uptrend i.e if they are green in color, then we say that the stock market is up or the Sensex closes positive. While when the Sensex or Nifty appears in red color or signal, we say that the stock market is down if the market closes negative. As I already said earlier, just like blood reports explain the health of the patient. Similarly, Nifty & Sensex defines the current situation of the stock market. 

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SENSEX

If Nifty & Sensex are green in color, it implies that they are trading at prices higher than yesterday. This again means that Nifty & Sensex are above the trading point where they closed yesterday. If Nifty & Sensex are in red color, it means that they are at prices lower than the previous trading day's closing value. The term 'Sensex' is created by combining the words 'Sensitive' and 'Index'. Sensex is formed by combining the 'Sens' from Sensitive and 'ex' from Index. In Sensex, 30 well-established companies from different sectors having excellent track records are present are listed on the Sensex. This means that Sensex's movement is completely dependent on the share price movements of these 30 companies.

NIFTY

The word 'Nifty' is formed by combining the two words- National and Fifty because there are 50 companies listed in the Nifty. In Nifty, 50 well-established companies from different sectors having excellent track records are present. This means that the Nifty's movement is quite dependent on the share price movement of these 50 companies. As Nifty is the main index of the NSE, it is also known as Nifty 50.

(In simpler terms, the Sensex's movement depends on the performance of 30 companies present in the Sensex, While Nifty's movement depends on the performance of 50 companies present in the Nifty.)

Big, popular, and well-established companies in their sectors are generally available in the Nifty, and these companies are picked from various other sectors this way Nifty and Sensex cover companies from different sectors. That's why the performance of the Nifty & Sensex depict the performance of the stock exchanges.

What are Sensex and Nifty

 

The stock exchanges have different other indices as well. The NSE & BSE has almost all indices present. The well-established companies of a particular sector are present in the sectoral indices. So, if you want to track just the banking sector & see how it is performing, then you can check on the indices by viewing BANKEX at BSE or BANK NIFTY at NSE.

[Also read, What is Share Market?]

[Also read, Who are Brokers in Share Market?]

On the stock exchange, the small-cap and mid-cap companies too have separate indices, Such as S&P BSE Small-Cap, S&P BSE Mid-Cap, Nifty Mid-Cap Fifty, etc.
Nifty, Sensex, and other indices are used as Benchmarks for investment purposes.
It means that you can figure out through Nifty and Sensex that whether your investment has provided you better returns or not.
For example, in 2021, Nifty provided a return of 53.23%
which means Nifty rose by 53.23% in 2021 and Sensex in 2021, provided a 15.75% return
This means that Sensex in 2021, rose by 15.75%
So, if your investments have given you more returns than this, then you can say that your returns on investments were amazing.
And if your investments provided you with a lesser return, then you can say that your returns on investments weren't good.

Similarly, if you have invested in a banking stock, then you can compare your returns at BANKEX on BSE & BANK NIFTY on NSE.
If you have invested in Mid-Cap stocks, then you can compare your mid-cap returns with mid-cap indices.
Sensex & Nifty are calculated using the Free Float Market Capitalization method. Sensex is the Free Float Market Capitalization weighted average of 30 companies available under Sensex, and Nifty is the Free Float Market Capitalization weighted average of 50 companies present under Nifty.

You don't need to go into details about the calculation of Nifty and Sensex. You just need to focus on whether Nifty and Sensex are increasing or decreasing. 

If the stock available in Nifty/Sensex is continuously performing badly then the stock exchange can replace it with well-established and consistently good performing stock and this decision is solely made by the stock exchange.
For instance, in 2016, NSE replaced the Bank of Baroda, Container Corporation of India Limited, General Insurance Corporation of India, Hindustan zinc Limited, Oracle Financial Services Software Limited, Power Finance Corporation Limited with Adani Enterprises Limited, Apollo Hospitals Enterprises Limited, Jubilant Foodworks Limited, MRF Limited, Vedanta Limited, Yes Bank Limited.

The way you discover the current situation of Stock Market India through Nifty & Sensex
Similarly, you can know the stock market conditions of foreign countries by viewing major indices of stock exchanges around the world.
For example, if you want to know the stock market situation of Japan, then you can view NIKKEI, the index of the Tokyo Stock Exchange. Similarly, New York Stock Exchange (NYSE) is of America.