What is Nifty in Share Market?

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  • 22 Jul 2023

Nifty, short for National Stock Exchange Fifty, is the primary index of the NSE. It comprises the top 50 actively traded stocks listed on the NSE. These stocks belong to various sectors and represent a substantial portion of the total market capitalization on the exchange.

NIFTY 50 serves as a benchmark in the Indian stock market. It represents the top 50 equity stocks out of 1600 stocks traded on the exchange. The composition of NIFTY 50 encompasses a diverse range of sectors within the Indian economy, including IT, financial services, metal, pharma, etc.

NIFTY 50 provides a comprehensive market representation by including stocks from varied sectors, offering insights into the performance and trends across multiple industries. It is a prudent indicator of the overall health and movement of the Indian stock market, aiding investors and market participants in making informed decisions based on the index's performance.

Now that you know about Nifty’s definition, let’s examine how its value is computed. Nifty follows a transparent and well-defined methodology for its calculation. It employs the free-float market capitalization-weighted methodology, which considers each company's market value and the number of its free-float shares (shares available for trading).

The calculation of Nifty involves multiple steps:

  • Selecting the Stocks: NSE identifies the top 50 stocks based on specific criteria such as liquidity, market capitalization, trading frequency, and other eligibility norms.

  • Assigning Weights: Each stock is allocated a weightage based on its free float market capitalization. A higher market capitalization translates into a higher weightage in the index.

  • Calculating the Index Value: The index value is derived by multiplying the market price of each stock by its corresponding weightage and then summing them up.

The NIFTY 50 index has a base value of 1000, which is a reference point for calculating its current value. The formula used to determine the index's value is as follows:

Value of Index = Current Market Value / (1000 X Base Market Capital)

However, it's important to note that the formula is not the sole factor in calculating the index's value. Changes in corporate procedures, such as stock splits, rights issues, and other relevant events, are also considered.

These adjustments ensure that the index accurately reflects the impact of such corporate actions on the overall market value. By accounting for these changes, the NIFTY 50 index maintains its integrity as a reliable measure of market performance.

Eligibility Criteria for Nifty Listing

NIFTY undergoes a reconstitution every 6 months to stay up-to-date with the latest stocks and market trends. During this process, the index considers the 6-month performance of stocks and evaluates whether a company's shares meet the eligibility criteria. A team of professionals at NSE Indices Limited carries out the management of the NIFTY index.

An Index Advisory Committee, consisting of experts in the field, provides guidance and expertise on significant issues related to equity indices. This committee plays a crucial role in advising the index managers on including or excluding stocks from the benchmark. Before the reconstitution, which takes place four weeks in advance, companies under consideration for addition are notified.

To be eligible for listing on NIFTY, stocks must fulfill certain criteria. These criteria are necessary to maintain the integrity and quality of the index.

  • A company must be registered with the National Stock Exchange (NSE) and be incorporated within the country's jurisdiction.

  • The company's stocks must exhibit high liquidity. This liquidity is determined by calculating the average impact cost of trading a single security relative to the company's market capitalization, as reflected in the index's weight.

  • The company's impact cost over six months should be equal to or less than 0.50%. Moreover, at least 90% of the observations and analyses made on a portfolio valued over Rs 10 crores should meet this criterion.

  • This requirement ensures that the stocks included in the portfolio possess sufficient liquidity, allowing for ease of trading and minimizing the impact on the market when buying or selling these securities. By setting specific liquidity standards, investors and fund managers can make more informed decisions and manage their portfolios more effectively.

  • For a company to be considered for inclusion in the index, it must demonstrate a trading frequency of 100% over the past six months.

  • To qualify for inclusion in the index, a company must meet specific criteria related to its free-floating average market capitalization. The company's market capitalization should be at least 1.5 times greater than the smallest company included in the index. This requirement ensures that the selected companies in the index possess a certain level of market capitalization, reflecting their significance and stability in the market.

  • Inclusion in the Nifty 50 index is not limited to companies with ordinary shares only. Companies that issue DVR (Differential Voting Rights) shares are also eligible for inclusion in the index. This means that companies that offer shares with varying voting rights can still be considered for membership in the Nifty 50 index.

In addition to its routine 6-month reconstitution, Nifty undergoes reconstitution when specific events occur, such as spin-offs, suspensions, compulsory delisting, or mergers and acquisitions involving its constituent companies. These events prompt a review and potential adjustment of the index's composition.

Furthermore, Nifty conducts quarterly screenings of its constituent companies to ensure adherence to the portfolio's ETFs and Index Funds regulations. This regular monitoring helps maintain the integrity and compliance of the index.

In Conclusion

Nifty is a significant index in the Indian share market, representing the performance of the top 50 actively traded stocks on the NSE. It is a vital barometer for market movements, helping investors, traders, and analysts make informed decisions. By understanding Nifty and its calculation methodology, market participants can navigate the stock market more effectively and align their investment strategies with the overall market trends.

FAQs

No, Nifty’s weightage doesn’t change everyday.

Nifty has various indices such as NIFTY 50, NIFTY IT, NIFTY Bank, etc.

The NIFTY 50 index undergoes a rebalancing process twice a year, specifically in the months of June and December. During these periods, the index is adjusted to reflect any changes in the composition of the top 50 stocks. This semi-annual rebalancing ensures that the index remains up-to-date and accurately represents the evolving market dynamics and stock performances.

There are two primary market conditions that investors commonly observe. The first is a range-bound market, characterized by a trading range in which the market oscillates between defined support and resistance levels. The second market condition is known as a bull trend. A range-bound market typically precedes this type of trend.

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