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What is Nifty and How It is Calculated?

Updated on :  

08 min read.

What is Nifty?

Nifty is the National Stock Exchange (NSE) stock market index. It consists of 50 top companies traded on the NSE based on free-float market capitalisation. For instance, free float means shares available for purchase by the general public. The Nifty combines the words ‘National Stock Exchange’ and ‘Fifty’. 

Nifty is also called the CNX Nifty or the Nifty 50. It was launched in 1996 and managed by NSE Indices Limited. It is a popular barometer to check the performance of the stock market. 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. For instance, TCS, Asian Paints, Maruti Suzuki India Ltd, HDFC Bank, RIL etc., are components of the Nifty 50. Moreover, Nifty consists of several sub-indices such as Nifty Next 50, Nifty Auto Index, Nifty Bank Index, Nifty IT Index, Nifty FMCG Index etc. 

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 to be part of 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 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 on 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.  

How is the Nifty calculated?

The market capitalisation of companies is determined by calculating the Nifty. It involves multiplying the company’s share price with the equity to calculate market capitalisation. 

The equity capital is then 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 the 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 index value of Nifty daily. 

The formula for calculating 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 inability of the index mutual fund scheme to buy and sell the underlying stocks of the index. 

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 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. It is because inflation increases borrowing costs for companies, thereby impacting their expansion plans. 

Higher inflation reduces discretionary spending, meaning companies find fewer buyers for their products and services.  

Conclusion:

Nifty is operated by NSE Indices Ltd., a subsidiary of the NSE. Nifty goes through reconstitution if a company undergoes significant corporate actions such as spinoffs, mergers and acquisitions, compulsory delisting etc.

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