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Sensex vs Nifty

Sensex vs Nifty

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Published by Fawaz Mushtaq

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Published by: Fawaz Mushtaq on Feb 07, 2011
Copyright:Attribution Non-commercial


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Sensex vs Nifty
SENSEX is the sensitive Index of Bombay Stock Exchange (BSE), India, a Market Capitalization Weighted average of 30 large and financially stablecompanies’ BSE stock prices. These 30 companies account for a half of the total market capitalization of BSE. Started since 1986, SENSEX is monitoredby most of the global markets as well .NIFTY is Standard & Poor’s CRISIL NSE Index 50, is the index for large and financially sound companies who’s stocks are being traded on National of National Stock Exchange (NSE) of India. Started since November 1995, nifty is most widely used for benchmarking index funds, index basedderivatives and to evaluate the overall performance of the nation’s stock market over time.On plotting the daily closing values of Sensex and Nifty over last three months(25th February to 25th May, 2010 i.e. more than 50 samples), with thehypothesis that SENSEX is independent variable and Nifty is dependent on SENSEX, by performing ANOVA or Analysis of variables test in MS-Excel, thecoefficient of correlation or R-square comes out to be 85% and the hypothesis proves to be correct with 95% confidence. The inference from abovemathematical analysis is that even though both indices belong to separate markets, their performance/daily movement is almost identical, which canbe spotted visually as well, because both the curves fit very well and mostly give identical information.The war between the two has intensified due to the ever rising competition between NSE and BSE. Both of them have their own USPs. The marketCapitalization of NSE is almost twice of BSE, but, the BSE is the oldest stock exchange in Asia and has its own history. The fact that both are havingmany independent powers & separate entities worsens the situation. So, the only common link between them now is SEBI, which has a totally differentrole, as it’s a regulatory authority to watch and control the legal and ethical aspects of the market and protect the interests of shareholders. Hence, noone, not even the SEBI is an intermediary between the two, thereby, intensifying the competition between them to become the preferred exchange fortop companies. Even though the competition is healthy for any company to emerge stronger, provide more value added services and work smarter, itbecomes totally unhealthy and destructive when there are price wars and a red ocean causing them to put their riches in advertising and other unduemarketing/brand building expenses.So, whom to track? Whom to believe and follow? Which of them is a better indicator of the market? Who is better in gauging the Indian stocks?Ironically, it doesn’t matter at all. Both SENSEX and Nifty are well diversified and contains many similar companies’ stocks. So, even though Nifty hasgot 20 more companies, that’s 67% more variety, both SENSEX and Nifty moves in the same direction and the trend seems like totally correlated.There is a definite difference in scale or magnitude, but, after scaling and equalizing both to similar bases, there will be hardly any difference in bothindexes. So, the choice is based only on convenience and not on the performance. The global markets prefer SENSEX because that was the only optionwith them earlier and they don’t want to switch to other without any clear reason for that sudden change. As far as the Index funds are concerned,they deal on a huge volume, hence, dealing on a low turnover BSE might create huge swings, so, they prefer the NSE. As most of them anyways dealin NSE, it makes a point to use Nifty than SENSEX as SENSEX gives perception of BSE, which might create some confusion in the minds of customers.The same is the reason whyMoneyvidya,which is a free stock advisory service for Indian investors also track the performance of the registered analysis by comparing their stock pick’s returns with Nifty. The portal started with accepting stocks listed in NSE, hence, the initial choice was Nifty,but, there were many stocks, which were listed on BSE and not on NSE, hence, they started BSE stock picks service as well. Now, even for stockswhich are in BSE and not listed in NSE, are also evaluated vis-a-vis the Nifty for that period as other it will kill the consistency and make it difficult forthe designers to rank each individual.
The country's two premier stock exchanges, the Bombay Stock Exchange [ 
 ] and the National Stock Exchange, are locked in a brand war to popularise their keyindices, the Sensex and the Nifty-50, respectively.

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