These days the one thing that has continued to hog the limelight is the surge in the Indian stock market. We hear everyday that the Sensex and the Nifty have broken all previous records and have reached their all-time high. Before we know why it is happening, it’s important that we understand these indices well.

BSE Sensex or Sensitive Index is the most sought-after Index of Bombay Stock Exchange comprising of 30 major listed companies and NSE Nifty is the Index of National Stock Exchange comprising 50 major listed companies. Both measure the price movements in the shares of constituent companies from diverse sectors of economy and that’s why they are called the ‘Barometer of Economy’. They indirectly measure the health of the economy by telling us about the confidence of investors in companies from various sectors.

Why do we see that Sensex is in the 20,000+ range and Nifty in the 6500+ range? Well, there’s a reasonable explanation to it.

Firstly, the composition of the two indices is different and different weights are assigned to common scrips (Infosys, ITC, etc) between the Sensex and the Nifty. More companies in an index means more market capitalization of the index, lesser weight to a company in the Nifty (50) as compared to the Sensex (30), therefore the lesser value of Nifty.

Secondly and most importantly, the base years (for calculating the index) are also different. The base year for the Sensex is 1978-79 and the base value is 100. For Nifty the base year is 1995 and the base value 1,000.

How are Sensex/Nifty values computed? The values of these indices are computed on the basis of the Free-Float Market Capitalization (FFMC) of the constituent companies. FFMC is the market value of shares which are readily available for trading by public (shares possessed by directors, promoters, govt etc are not included in FFMC computation).

Lets understand FFMC with this example,

1. Suppose, Reliance Industries Ltd (RIL) has a total 1 lakh shares: 30,000 held by Mukesh Ambani and rest 70,000 held by the general public.

2. The value of each share in Bombay Stock Exchange (BSE) on 25 March 2014 is Rs 880.

Now, we first calculate FFMC for RIL, which is nothing but Number of shares held by general public multiplied with Value of Each share on the given date in Bombay Stock Exchange (BSE) ie 70,000 x 880= 6.16 crore rupees.
So, RIL’s FFMC for 25 March 2014 would be 6.16 crore rupees.

FFMC’s Role in Sensex Computation

Like RIL, pick up all 30 companies, calculate their FFMCs, add them together. This number becomes the basis of Sensex or Nifty computation. Lets say FFMC of 30 companies was 200 crore rupees on 25th March 2014. And FFMC as on 1st April 1979 was say 1 crore rupees.

INDEX = new price / old price (% value)

Now, Sensex on 25th March = Total Free float market cap (FFMC) of 30 companies today divided by Total (FFMC) of 30 companies on 1st April 1979=(200 crores / 1 crore) x 100 = 20,000

This 20,000 is the Sensex value for 25th March 2014.

In the end, reasons for huge buying activity in stock market (leading to an all time high Sensex 22,079.96 and Nifty 6,589.75) can be summed up by,

1. CPI Inflation at 25 months low at 8.1%.

2. Current Account Deficit lowered in 3rd quarter to $4.2 Billion ( expected to be around $40B for this fiscal 2013-14 as compared to $88B of last fiscal).

3. Large institutional investors expecting a BJP led coalition government after the general elections 2014. Investors believe that it’d be more business friendly and revive economic growth leading to a vibrant economy and better capital appreciation opportunities for them in future and thus a huge buying of stocks is in the order.

I hope this article helps in answering a lot of questions relating to the Sensex and Nifty.