What is the NIFTY 50 Index?
NIFTY 50 is the most important index of the National Stock Exchange of India Limited (NSE), which is located in Mumbai. It evaluates the performance of 50 blue-chip stocks, the most reliable and liquid among Indian securities.
Blue-chip stocks refer to shares of the most well-recognized and trustworthy enterprises with a reputation for financial soundness. Of the approximately 1600 companies listed and traded on NSE, the 50 stocks make up an efficient portfolio since they cover major sectors of the Indian stock market like financials, energy, utilities, and technology.
Blue-chip stocks that make up the index must be domiciled in India and listed and traded on the NSE. Some of the companies that currently make up the index are State Bank of India Ltd., Bharat Petroleum Corporation Ltd., JSW Steel Ltd., and Bharti Airtel Ltd.
The components of the index are not constant; old companies are removed (if their performance deteriorates consistently), and new companies are added (once they fill certain criteria regarding liquidity, free-float market capitalization, listing history, and trading frequency) regularly.
- NIFTY 50 is the most important index of the National Stock Exchange of India Limited (NSE), located in Mumbai.
- A stock market index measures the performance of the entire market or a subset thereof.
- The NIFTY 50 index is calculated using a process called the free-float market capitalization-weighted method.
What is a Stock Market Index?
A stock market index measures the performance of the entire market or a subset thereof. A selected group of stocks that reflect the state of either the entire market or a segment of the market constitutes the index.
Fluctuations in the prices of the stocks are an indicator of market movements, and investors can compare price levels in different periods to evaluate market performance.
How is the NIFTY 50 Index Calculated?
The NIFTY 50 index is calculated using a process called the free-float market capitalization-weighted method. It reflects the total market value of all stocks in the index relative to a base period value (November 3, 1995).
Market capitalization, or market cap, is the total value of a company’s shares held by all investors, including the organization itself. Free-float market cap captures the total market value of those shares which are available for public trading, that is, that are not held by company owners or the government.
Using the weighted method means that the component of each stock in calculating the index is assigned a weight according to the total value of its outstanding shares.
The total market cap of each stock is computed by multiplying it with a float-factor or Investible Weight Factor (IWF). It considers only those shares that are available for public trading and exclude the following categories:
- Shares held by company owners and promoters
- Shares held by the government
- Shares held through American/Global Depository Receipts (shares held by foreigners indirectly through foreign financial institutions in India)
- Strategic stakes by corporate bodies
- Investments held under FDI
- Shares held by associate companies (cross-holdings)
- Employee Welfare Trusts (for example, shares given to employees of the company as some form of security)
- Locked-in shares (shares that cannot be traded, due to some regulation imposed on the company by a regulatory authority)
Market capitalization = Shares Outstanding * Current Price
Free-float Market Capitalization = Market Cap * IWF
Index Value = (Current Market Value/Base Market Capital) * 1000
The current market value is the weighted aggregate market cap of all the 50 companies. The base market capital is the weighted aggregate market cap of all 50 companies as in the base period.
Computing the Index: An Illustration
Let stocks A, B, and C form the NIFTY index. The following information (hypothetical) is given about the stocks (all values in INR).
Whenever the price of an individual stock changes, its weight in the index value also changes. The base market capital is INR 2.06 trillion. Given the current index value, one can easily calculate the current market value.
Stocks in the NIFTY 50 capture approximately 65% of the float-adjusted market capitalization of the NSE, and the index is therefore considered a true reflection of the Indian stock market.
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