What Is Nifty and How It Is Calculated – Complete Guide

In this article, we will discuss NIFTY 50 and how to calculate the NIFTY 50 index. To begin with, Nifty is a well-known stock index introduced by the National Stock Exchange of India. This stock index was set up in 1992 and commenced trading in 1994. It is owned and governed by IISL and is known as India Index Service & Products Limited. IISL is an Indian toiled company that focuses on an index as their product. It has an immense diversity of financial products like Stock futures and options, Index funds and options, Index futures, etc. 

The NIFTY 50 Index has grown into India’s largest single financial instrument through an ecosystem of exchange-traded funds (domestic and offshore), NSE listing options, SGX overseas futures, and options. The WFE, IOM, and FIA surveys support NSE leadership positions. 

The NIFTY 50 Index incorporates 13 sectors of the Indian economy and provides investment managers with exposure to the Indian market from a single portfolio. NIFTY 50 Index Shares by NSE Market Capitalization Between 2008 and 2012 NIFTY Bank, NIFTY IT, NIFTY Pharma, NIFTY SERVICE SECTOR, NIFTY Next 50, NIFTY 50 Index 39.47% for Financial Services, 15.31% for Energy Weights are according to %, IT 13.01%, consumer goods 12.38%, automobiles 6.11%, and the agricultural sector 0%. 

There are several terminologies and facts in the stock market that every investor or analyst must know. You cannot get a hold on it by looking at other’s investment methods. So you can join a stock market institute if you plan to make a career in the stock market. The Thought Tree is one such institute in the market that provides best stock market course in Jaipur.    

We will now be discussing the Stock index to understand NIFTY 50 better.  

Stock Index 

A stock index is a kind of tool to measure the changes taking place in the stock market. It measures the price movements and also market performance. To create a stock index, one has to group these stocks having similar characteristics from the stock list. Stocks can be of different types based on the nature of the industry, the size of the company, or the total market capitalization. 

It is easy to calculate the value of the stock market index. One needs to use these values of a particular group of stocks. For example, if the price of these groups of stocks rises, then the index will also rise. 

The stock index expresses the overall price movements and market sentiments. Investors and financial managers use this as a tool to measure the portfolio holding value. 

Nifty 50 Index

As I have mentioned earlier, NIFTY 50 is the most significant index of NSE in short for National Stock Exchange, India limited. NIFTY 50 assesses the performance of 50 blue-chip stocks, which are the most liquid and credible among Indian securities. 

Calculating NIFTY 50 Index 

A process called the free-float market capitalization method is used to calculate the NIFTY 50 index. This method reflects the total market value of stocks in a particular index comparative to a base period value. 

Convertible market capitalization records the total market value of shares available for public trading, Shares not owned by business owners or the government. Using the weighted method means that each stock component in the index calculation is assigned a weight based on the total value of its outstanding shares.

Calculating the Total market capitalization includes stock multiplication by the net coefficient or the Investable Weight Factor (IWF). 

Market Capitalization 

Market capitalization is the total value of a company’s stakes held by all the stock investors, entailing the organization itself. A free-float market cap apprehends the total market value of a company’s shares available for general trading. However, these shares are not held by the company’s owner, government, or other organizations. 

Using this method only means that the component of every stock in estimating the index as weight according to the total value for outstanding of the company shares. The total market cap of stocks is evaluated by multiplying it with an IWF in short for Investable Weight Factor or float-factor. It contemplates only those shares available for public trading. 

Market Cap = Price * Shares 

Floating Market Cap = Price * Shares * Investable Weight Factor 

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

The Investable Weight Factor (IWF) is a factor determining the number of shares available for trading. The index is calculated in real-time because the value of the stock also changes daily. The formula calculates not only value but also changes in company procedures. For example, changes in the company can be stock splits, rights issues, etc. Nifty Shares Market is a benchmark against which all Indian stock markets are measured. It regularly performs maintenance checks on indexes. Thus, this ensures that it is stable and working efficiently. This could be the norm for the Indian stock market. 

Requirements for being listed in NIFTY 50 

  • Some eligibility criteria are given by the NIFTY 50 that every company must fulfill to list on the NIFTY 50 index. Let’s have a look at them. 
  • The company applying for NIFTY must be an Indian domicile company and registered with the National Stock Exchange. 
  • Company stocks are highly liquid, and liquidity is the company’s average impact cost. Must be 0.50% or less.
  • Over the last six months, the company has to maintain 100% transaction frequency. 
  • A company needs the mean free path market capitalization to get listed on NIFTY. It is 1.5 times higher than the smallest constituent of the index. 
  • Shares which have DVR or Differential Voting Rights are furthermore eligible for the index. 

The NIFTY index is reconstituted every six months and analyzes the performance of a stock over this period. Depending on this performance, and given that a company and its stable base meet all the eligibility criteria mentioned above, the list may include or exclude new/old shares. If new additions and deletions occur, then the companies will get the info within four weeks. 

In extension to a periodic cycle, If a company incurs a settlement plan for events related to a suspension, mandatory write-off of a spin-off, and a merger import. 

Read More: Tips for Investing in the Stock Market 

Benefits of Investing in NIFTY 50 

There are different ways to invest in Nifty 50. Some of them are index funds, Nifty futures and options, and ETFs. You cannot invest directly in the index; instead, you must buy all 50 stocks in equal weight or invest in index funds and ETFs. Here are the benefits of investing in Nifty index funds and ETFs:  

  1. Good Long Term Yield: The Nifty 50 began in 1996 with an underlying value of 1000. It will hit 15,000 marks in 2021. Therefore, investing in index funds will provide good returns in the long run. 
  2. Unbiased on the part of the fund manager: the index fund portfolio is directly dependent on the index, and the fund manager has no control over it. Hence, it is free from fund manager bias. 
  3. Lower Expense Ratios: Index funds have lower expense ratios than other types of mutual funds. In passive funds, fund management fees get deducted. The role of a manager looking after funds is limited to passive funds. 
  4. Market Return: Index funds provide market returns because they are index clones. Their performance depends directly on the evolution of the indicator. As a result, it will be easier to keep track of investments. 

Conclusion

In this article, we have seen the what is Nifty, Stock Index, Nifty 50 Index, Blue-chip stocks, how NIFTY 50 index is calculated, requirements for getting listed in NIFTY 50, and benefits of investing in NIFTY 50. 

The Stock Market is a hot topic, and people love to engage with it in today’s time. If you plan to make a career in the stock market, then The Thought Tree will help you achieve your goal.  

I hope this article helped make you guys understand what is NIFTY 50 and how it is calculated. 

Jacob Barlee

Jacob Barlee is a digital marketer and technical writer at Mobzway. I’m passionate about exploring and writing about poker, casino software and online gaming development business. Mobzway is one of the top poker and casino software development company across the world.