What is Nifty and How It is Calculated?

Nifty 50 is one of the benchmark indices that represents the Indian stock market globally. It consists of India's top 50 traded companies listed on the NSE and is the flagship of the NSE. Let's understand Nifty, how it was calculated, and how it works.

What is Nifty?

Nifty is the benchmark index of the National Stock Exchange (NSE). It comprises 50 top companies traded on the NSE based on free-float market capitalisation. Free float means shares are available for public purchase. The Nifty combines ‘National Stock Exchange’ and ‘Fifty’ in its name and it covers major sectors of the Indian economy and offers investment managers exposure to the Indian market under one efficient portfolio.

The Nifty also called the CNX Nifty or the Nifty 50, was launched in 1996 and managed by NSE Indices Limited, one of the NSE's subsidiaries. It is a popular barometer for evaluating the stock market's performance. For instance, if the stock market was up today, it usually means the Nifty 50 was up today.

The stocks that comprise the Nifty 50 are well-established companies with a global footprint, such as HDFC Bank Ltd, ICICI Bank Ltd, Reliance Industries Ltd., Infosys Ltd., Bharti Airtel Ltd., Larsen & Toubro Ltd., ITC Ltd., Tata Consultancy Services Ltd, Axis Bank Ltd, and Kotak Mahindra Bank Ltd.

How are stocks chosen for the Nifty 50 Index?

NSE ranks companies based on free-float market capitalisation. It then chooses the top 50 companies in the Nifty 50 Index. The following are the criteria for picking stocks for the Nifty 50:

• Stocks should have sufficient traded volume to ensure liquidity and broad investor participation. 
• Stocks should be available for trading in the Futures and Options (F&O) segment.
• Stocks should be listed on the stock exchange for six months. However, in the case of IPOs, stocks should have been listed for at least one month. 
• The company must be registered with the NSE and be domiciled within India, 
• The company should have a 100% trading frequency over the past six months.
• Companies with Differential Voting Rights (DVR) shares are eligible to be a part of the Nifty 50. 

The list of stocks is reviewed every six months. Those who don’t meet the criteria are eliminated from the Nifty 50. However, replacements are added from companies that match the NSE criteria.

The NSE intimates to the public at least four weeks before the changes are made. It is vital as financial products and baskets are built around possessing Nifty 50 stocks. Moreover, it gives time for baskets to realign their portfolios. 

Studies have shown that a stock price rises on the news of its inclusion in a stock market index. Moreover, the stock price may crash upon removal from the stock market index. In simple terms, the Nifty 50 weeds out stocks of non-performing companies from its portfolios while replacing them with solid performers.  

What are the Stocks Nifty 50 Holds?

Nifty 50 consists of the top 50 stocks which are trading on the NSE such as

Disclaimer: stocks are shown as of 24-03-2025, 
Source: NSE INDIA.

How is the Nifty calculated?

Calculating the Nifty determines a company's market capitalisation. This involves multiplying the company’s share price with its equity. 

The equity capital is multiplied by the share price to calculate free-float market capitalisation. Moreover, whatever result you get must be multiplied by the IWF (Investable Weight Factor), which shows the share proportions traded by investors in the stock market. 

The Nifty is calculated using a base value of 1,000. The market value is divided by the base market capital multiplied by the base value of 1,000 to determine the daily index value of the Nifty. 

The formula for calculating the Nifty Index:

Market Capitalisation = Equity Capital * Share Price

Free float market capitalisation = Share Price * Equity Capital * Investable Weight Factor (IWF)

Index Value = Current Market Value / (1000 * Base Market Capital). 

The formula also determines changes in corporate action, such as rights issues, bonus issues, stock splits, etc. 

How can you invest in the Nifty 50?

You can invest in the Nifty 50 through Index Mutual Funds that track and replicate the Nifty 50 portfolio. It rises and falls in line with the Nifty 50. 

However, you must pay attention to the tracking error, which is the deviation in the index funds' returns from the benchmark index, in this case, the Nifty 50. It is caused by the index mutual fund scheme's inability to buy and sell the index's underlying stocks. 

You can trade in the Nifty 50 stocks through Derivative Contracts like F&O (Futures and Options). It uses the index as an underlying asset where price fluctuations are linked to the Nifty 50 Index.  

What are the factors that cause changes in the Nifty?

A global recession may impact the performance of the Nifty Index. Rising inflation negatively affects the Nifty Index because it increases companies' borrowing costs, thereby impacting their expansion plans. 

Higher inflation reduces discretionary spending, meaning companies find fewer product and service buyers.

Conclusion:

The Nifty 50 is a benchmark index representing the top 50 companies on the NSE, offering broad exposure to India's economy. It is calculated based on free-float market capitalisation and reviewed every six months. 

Investors can access it through index mutual funds or derivative contracts. The index reflects the performance of key sectors, with changes driven by market conditions and corporate actions
 

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