What is NIFTY?
NIFTY, or the National Stock Exchange Fifty, is a significant market index introduced by the National Stock Exchange (NSE) on April 21, 1996. It consists of the top 50 equity stocks traded on the NSE, chosen from a large pool of around 1600 stocks. These 50 stocks come from diverse sectors of the Indian economy, including technology, finance, consumer goods, entertainment, metals, pharmaceuticals, telecommunications, and more.
Managed by the India Index Services and Products (IISL), a subsidiary of the National Stock Exchange Strategic Investment Corporation Limited, NIFTY 50 acts as a benchmark index and the primary index of the NSE. It closely monitors the performance of leading companies, giving insights into overall market trends. Furthermore, NIFTY includes various sub-indices like NIFTY IT, NIFTY Bank, and NIFTY Next 50. It’s also an essential part of the Futures and Options (F&O) segment of the NSE, facilitating trading in derivatives.
Eligibility for listing in Nifty
To be listed on Nifty, companies have to meet strict criteria to ensure only the best-rated firms make it into the index. Here are the key requirements for companies aiming for Nifty listing:
- Indian Company Registration: Firms must be registered on the National Stock Exchange (NSE) and incorporated in India.
- High Liquidity: Eligible companies’ stocks need to show high liquidity, measured by the average impact cost over six months. Impact cost indicates how the trading price of a single security relates to the index’s weight and the company’s market value.
- Trading Frequency: Companies must demonstrate a 100% trading frequency, meaning their stocks are actively traded.
- Free-floating Average Market Capitalization: The average market value of freely traded shares of a company must be at least 1.5 times higher than the smallest company listed on the index.
- Inclusion of DVR Shares: Nifty 50 may include shares of companies with Differential Voting Rights (DVR) as eligible securities.
- Compliance with Regulatory Norms: Any changes in listed companies’ structure, like mergers or demergers, trigger a review of their eligibility for Nifty 50. Quarterly reviews ensure compliance with SEBI regulations and other norms.
These criteria ensure that Nifty-listed companies maintain high liquidity, active trading, and regulatory compliance, upholding the index’s reputation as a benchmark for India’s top-performing firms.
How is Nifty Calculated?
The Nifty 50 index calculation is all about accuracy and keeping up with stock changes. It shows the combined value of stocks in the index for a certain time, starting from November 3, 1995, when it began, with a base value of 1000, equaling Rs. 2.06 trillion.
To calculate the index, they use the market capitalization and free float market capitalization. These consider things like price, how much of the company’s shares are out there to trade, and more. The formula divides the current market value by 1000 times the base market capital, letting it adjust to stock price changes in real-time.
The formula for calculating the index value isÂ
Market capitalization = Price * Equity Capital
Free Float Market Capitalization = Price * Equity Capital * Investable Weight Factor
Index value = Current market value / (1000 * Base market capital)
The formula also handles company changes, like stock splits or rights issues, to keep the index stable. Nifty regularly checks everything to make sure the index stays reliable and the market runs smoothly.
Importance of NIFTY
The Nifty, also known as Nifty 50, is super important in India’s financial world, and here’s why. First off, it’s like a big scoreboard for the Indian stock market. It shows how the top 50 biggest and most traded stocks on the National Stock Exchange (NSE) are doing. This helps investors, traders, and anyone else see how well the Indian stock market is doing overall.
People pay close attention to how the Nifty’s value changes because it tells us a lot about what people are feeling about the market. If the Nifty goes up, it usually means people are feeling good and optimistic. But if it goes down, it might mean people are feeling more cautious or worried. And it’s not just a number on a screen, it’s a handy tool for investors to see if their investments are doing better or worse than the whole market.
Plus, the Nifty isn’t just sitting there. It’s also in the derivatives market, where investors can do things like protect themselves from market risks or make bets on where the market might go. Since it covers lots of different parts of the Indian economy, it can give us clues about how different industries are doing and how the economy is doing overall.
The Nifty has been around for a while, and it’s been pretty steady. That makes investors feel good about investing in Indian stocks, both in India and around the world. So, all in all, the Nifty does a lot of important stuff in India’s financial world. It tells us about the mood of the market, helps investors manage their money, and makes people feel good about investing in India.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.