India Sensex vs NIFTY

BSE's Sensex and NSE's NIFTY both are designed to track the Indian stock market. While the two indices are closely co-related (better than 0.9), there are some differences in the way the indices are calculated.

NIFTY takes the full market capitalization of a company and divides it by the total market capitalization for all the stocks it tracks (50) to give the index weighting for the stock. Sensex on the other hand uses free-float as the measure. Free-float is defined as that amount of stock of the company (and associated market cap) that is not held with the promoters. The free-float method is often seen as a better reflection for trading purposes as it reflects only the amount of shares available for trading of a particular company.

Other key differences are as follows:

• Sensex is overweight on financial services and auto stocks compared to NIFTY
• NIFTY is overweight on oil, gas and refining; telecom, metals and power compared to Sensex
• NIFTY has greater depth in derivatives.

It is important to understand these differences when you are trying to make sense of index movements, especially in the volatile Indian stock market.