What is Nifty & How is it Calculated – Complete Guide
Nifty is the acronym for the National Stock Exchange of India. Nifty is a stock market index of 50 stocks. The term Nifty is derived from the combination of two words – National and Fifty. Nifty consists of 50 actively traded stocks of the Indian Stock market. It represents about 75% of the total market capitalization on both the Bombay Stock Exchange and India’s National Stock Exchange.
Nifty index is a tool that provides investors with an indication of what might happen in the market and helps them to trade stocks more efficiently. It has 50 components, which are weighted according to their market capitalization (the bigger a company’s share price, the higher it will be on the index). This means that companies with greater value have more weighting in determining how far or fast prices can rise or fall; this makes it easier for investors to know where they stand in relation to others by looking at changes in values over time.
Nifty was created in 1996, with a base level set at 1000 points. Today, the NIFTY-50 index is one of the most popular indexes for measuring performance in Indian stock markets and has become an icon for investors who are interested in investing in India’s economy.
Main stocks in Nifty 50
The stocks in the index have been chosen by taking into account various factors such that they represent diverse industries of the Indian economy with high transparency standards which can provide information about them easily. Most stocks in the Nifty 50 index are from the banking, financial services and insurance sectors.
Reliance, HDFC Bank, ICICI Bank, Larsen & Toubro, Tata Motors, TCS, Infosys, Wipro, ITC, JSW Steel, Tata steel, Ultratech cement, Asian Paints, Hero Motocorp, Maruti Suzuki are some of the stocks that are in the NIFTY 50 index.
The NIFTY Index is reconstituted every six months and considers a stock’s performance over such a period. Depending on this performance, and given that a company and its stock fulfil all the eligibility criteria mentioned above, the list might include or eliminate new/old stocks, respectively.
Eligibility Criteria for 50 Stocks
There is a specific method by which stocks are selected to be a part of the Nifty 50 index in the Indian Stock Market. These stocks are selected based on their:
- Market capitalization (the size of a company).
This means that there are more large-cap firms in the index as compared to mid-cap or small-cap companies.
- Liquidity & Trading Volume
Another factor taken into consideration for Nifty is the liquidity of a stock. This means that stocks with a higher trading volume are more likely to be in the index.
The stocks are chosen based on their: Market capitalization, liquidity and price-to volume ratio. This means that the higher a company’s market cap is, the more likely it will be included in the index.
How is Nifty Calculated
The Nifty 50 index is calculated by taking the sum of all stocks in it and dividing that number with a base level set at 1000 points. This means if you buy one share worth Rs 100 from each company represented on this list, then your investment will be valued as follows:
Nifty calculation formula is:
Nifty Index = (Total Value of Stocks in NIFTY 50) / 1000
India’s Nifty 50 index is calculated by taking the sum of all stocks in it and dividing them equally among themselves. The number that results from this calculation becomes a new value for each stock which can be used to compare its performance with other companies on an equal footing.
Nifty reached a mark of 15,000 in the first quarter of 2021. It is estimated that Nifty will reach the 17,500 mark by the end of 2022. This shows how the Indian economy is expected to grow.
Other Indices in The World
Similar to Nifty, the stock market of the USA also has some indices. The Dow Jones Industrial Average is one of the most popular indices. It was created in 1896, and it has 30 stocks from various industries, such as technology or healthcare sectors that are traded on Wall Street (New York).
The NASDAQ Composite index consists only of tech companies listed at Nasdaq marketplaces, including Google Inc., Apple Inc, etc.
The Nikkei 225 Stock Average (NIKKEI) consists of only Japanese company shares listed in Tokyo, including Toyota Motor Corporation. Just as Nift constitutes 50 stocks, NIKKEI constitutes 225 stocks.
The KOSPI indices is yet another stock market index that represents the Korean stock market.
The Hang Seng Index is a Hong Kong-based index that represents the performance of blue-chip stocks in China’s economy, such as HSBC Holdings and Tencent Inc., which are traded on The Stock Exchange Of HK (SEHK).
The Indian stock market has another index that is called the S&P BSE Sensex.
The index is a free-float market capitalization-weighted stock price indices of 30 companies listed on the Bombay Stock Exchange (BSE). The stocks are from diverse economic sectors, including banking and financial services, energy & petrochemicals etc. To know more about this index, you may read our post on what is Sensex.
I hope that by now you might be clear what is Nifty and how important it is for the Indian stock market. Traders from all across the world keep an eye on Nifty to predict where the Indian stock market is heading. You can do the same. Keep an eye on Nifty and watch it out for yourself.