What Is Nifty?

Nifty is the stock market index for the National Stock Exchange (NSE). It is comprised of the top 50 companies listed on NSE by free-float market capitalization. Free float, for example, refers to shares that are accessible for purchase by the general public. The Nifty is a combination of “National Stock Exchange” and “Fifty.”

Nifty is sometimes referred to as CNX Nifty and Nifty 50. It was introduced in 1996 and is administered by NSE Indices Limited. It is a widely used indicator of the performance of the stock market. For example, if the stock market was up today, the Nifty 50 was likely up as well.

The equities comprising the Nifty 50 are well-established, multinational corporations. The Nifty 50 includes companies such as TCS, Asian Paints, Maruti Suzuki India Ltd, HDFC Bank, and RIL, among others. In addition, Nifty includes a number of sub-indices, including Nifty Next 50, Nifty Auto Index, Nifty Bank Index, Nifty IT Index, Nifty FMCG Index, etc.

Eligibility Criteria For Nifty Index Listing

The NSE ranks companies according to their free-float market capitalization. The top 50 companies are then selected for inclusion in the Nifty 50 Index. The following are the selection criteria for the Nifty 50:

  • The trading volume of stocks must be sufficient to ensure liquidity and broad investor involvement.
  • The Futures and Options (F&O) component should allow for the trading of stocks.
  • Stocks should be listed for six months on the stock exchange. In the event of IPOs, however, stocks must have been listed for a minimum of one month.
  • The company must be registered with the NSE and headquartered in India. The company’s trading frequency over the past six months must be 100 percent.
  • The Nifty 50 is open to companies holding Differential Voting Rights (DVR) shares.
  • The stock list is evaluated every six months. The Nifty 50 excludes those who do not match the criteria. However, replacements are added from NSE-compliant companies.
  • The NSE notifies the public at least four weeks prior to the implementation of amendments. It is crucial since financial instruments and baskets rely on the ownership of Nifty 50 equities. In addition, it allows baskets time to restructure their holdings.
  • According to studies, the price of a stock increases when it is included in a stock market index. In addition, the stock price may plummet if it is removed from the stock market index. Simply put, the Nifty 50 eliminates underperforming stocks from its portfolios and replaces them with strong performers.
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Top Companies Listed Under Nifty 50

Company Market Capitalization
Reliance Industries 18 Lakh Crore
Tata Consultancy Services 12.72 Lakh Crore
HDFC Bank  9.06 Lakh Crore
Infosys 6.95 Lakh Crore
ICICI Bank 6.55 Lakh Crore
Hindustan Unilever 6.25 Lakh Crore
State Bank of India 5.42 Lakh Crore
Bharti Airtel 4.91 Lakh Crore
Housing Development Finance Corporation 4.91 Lakh Crore
Adani Enterprises 4.47 Lakh Crore

*data as of 01/12/2022

How Is Nifty Calculated?

The Nifty is used to determine the market capitalization of companies. Calculating market capitalisation requires multiplying the share price by the company’s equity.

Multiplying the equity capital by the share price yields free-float market capitalisation. In addition, the result must be multiplied by the IWF (Investable Weight Factor), which represents the proportion of shares traded on the stock market by investors.

The Nifty is calculated using 1,000 as its starting point. The daily index value of Nifty is determined by dividing the market value by the base market capital multiplied by 1,000.

The formula for computing the Nifty Index:

Market Capitalization  = Equity Capital *Share Price

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

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

The formula also determines corporate action changes, including rights issues, bonus issues, stock splits, etc.

How Can You Invest In The Nifty 50?

Investing in the Nifty 50 is possible through Index Mutual Funds that duplicate and follow the Nifty 50 portfolio. It fluctuates in tandem with the Nifty 50.

However, you must be aware of the tracking error, which is the difference between the returns of the index fund and the benchmark index, in this case, the Nifty 50. It is caused by the Index Mutual Fund scheme’s incapacity to purchase and sell the index’s underlying stocks in tandem with the changes that take place in the Index.

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You can trade Nifty 50 equities via Derivative Contracts such as 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 worldwide recession may have an effect on the Nifty Index’s performance. Increasing inflation has a negative impact on the Nifty Index because inflation increases companies’ financing costs, limiting their expansion plans.

Higher inflation diminishes discretionary spending, resulting in fewer customers for businesses’ goods and services.

Conclusion

It is crucial to keep in mind that the index is nothing more than a collection of stocks and that equities in general are susceptible to short-term volatility. Long term, investing in the NIFTY 50 Index is a good entry point into the stock market and an excellent method to build wealth.

Since its introduction 27 years ago, the index has compounded at a rate of 11% annually. A 1996 investment of INR 1,000 has grown to INR 17,000 now. It is a worthwhile investment opportunity because of its exposure to the nation’s leading and highest-performing companies in all industries.

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