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What is Nifty and How it is Calculated?

nifty

Meaning of Nifty 

The Nifty meaning is a derivation from the mix of two words, i.e. “National Stock Exchange” and “fifty”. It is an abbreviation of the National Stock Exchange Fifty. It is a collection of top performing 50 equity stocks that are actively trading in the index. However, 51 stocks are currently trading on Nifty. Hence, Nifty is also known as Nifty50 or CNX Nifty.

Nifty is a popular stock index. The National Stock Exchange of India introduced it. This index was founded in 1992 and started trading in 1994. It is owned and managed by India Index Service & Products Limited (IISL). IISL is an Indian specialized company which focuses on an index as its focus product. It has a variety of financial products like index funds, index futures and options, stock futures and options, etc.

What is an Index?

A stock index is a measurement of the changes that take place in the stock market. It measures price movement and market performance. For creating an index, one has to group some stocks from the list of stocks with similar characteristics. This grouping of stocks can be on the type of industry, total market capitalization or the size of the company. 

To calculate the value of the stock market index, one can use the values of the underlying group of stocks. Any change in the value of underlying stock also leads to a change in the stock index value. If the price of most of the stocks rises, the index will again rise and vice-versa. 

Thus, an index is indicative of changes in the market. It reflects the overall market investing sentiment and price movements. Investors and financial managers use this to measure the value of portfolio holding. They can also use it for comparing the performance with the benchmark index. 

Some of the standard indices in India are 
  • Benchmark indices like NSE Nifty and BSE Sensex
  • A broad-based index like Nifty 50, BSE 100, Nifty Next 50, etc.
  • Market capitalization indices like BSE Smallcap, BSE Mid Cap, Nifty Small cap, Nifty Mid Cap, etc.
  • Sectoral indices like the Nifty FMCG index, Nifty Bank index, Nifty IT, Nifty Auto, etc.

Nifty 50 covers the following sectors of the Indian economy.

AutomotiveEngineeringMetals & Mining
Banking/FinanceFood & BeverageOil & Gas
Cement/ConstructionTechnologyPharmaceuticals
ChemicalsManufacturingRetail/Real Estate
Consumer durables & non-durablesMediaTelecom

It follows the patterns and trends of blue-chip companies. These are the largest companies with high liquidity in India. Nifty also contains several sub-indices based on separate asset classes, sectors, or segments. They are NIFTY IT, NIFTY Next 50, NIFTY Bank, NIFTY Small Cap, and many more. Also, Nifty has 1600 companies listed in it.

NIFTY 50 is a benchmark index by NSE. It is one of the two national indices and a broad-based index of the National Stock Exchange NSE. Also, NSE is a leading stock exchange in India. It is the largest trading platform in India. Another national index is Sensex which is a product of the Bombay Stock Exchange BSE. 

Which companies are a part of Nifty? 

For the latest stock performance, the Nifty index reconstitution happens every six months. It checks the 6-month performance of the stocks. It also checks if the companies fulfill the eligibility criteria. Following these criteria, it eliminates or adds stocks in the stock list, respectively. In case of any elimination or addition, the respective company is given a notice four weeks prior to reconstitution.

The NSE indices have an excellent team of professionals that manage the Nifty index. It is an advisory committee that offers guidance and expertise on issues that relate to equity indices.

The following is the eligibility criteria for companies for Nifty Index listing – 

  • The company must be registered with the National Stock Exchange. It must be an Indian company. 
  • The company’s stock must be highly liquid. The liquidity is measurable by the average impact cost. Impact cost is the trading price of single security in relation to the index’s weight to the company’s market capitalization. For six months, the company’s impact cost should be less than or equal to 0.50%. Otherwise, it should be lower with 90% of the observations made on a portfolio of Rs.10 crores. 
  • For the last six months, the company’s trading frequency should be 100%
  • The company should have a free-floating average market capitalization. This should be 1.5 times greater than the smallest company on the index.
  • Shares of the companies that have DVR or Differential Voting Rights can also be eligible for the Nifty 50 Index.

Apart from the periodical routine, the index also goes through a reconstitution when the company undergoes certain events—for instance, company events like spin-offs, mergers or acquisitions, suspensions or compulsory delisting. Additionally, Nifty conducts quarterly screening of the companies to keep track of whether they are adhering to regulations.

The companies must also adhere to specific mandates given by the Securities and Exchange Board of India (SEBI). Otherwise, the companies may be delisted from the indices. 

How is Nifty calculated?

Nifty 50 indices calculation uses the float-adjusted and market capitalization method. Here, the level index demonstrates the aggregate market value of the stocks present in it for a specific duration. This particular base duration for the Nifty index is 3rd November 1995. The base value of stocks is 1000, and the base capital is Rs.2.06 trillion

The formula for calculating the index value is as follows – 

Market capitalization = Price * Equity Capital

Free Float Market Capitalization = Price * Equity Capital * Investable Weight Factor

Index value = Current market value / (1000 * Base market capital)

Investable Weight Factor (IWF) is a factor to determine the number of shares available for trading. The index calculation is on a real-time basis as the value of stock also changes daily. 

The formula calculates not only the value but also the changes in the corporate procedures. For instance, changes in corporate can be stock splits, rights issues, and many more. Nifty share market is a benchmark for measurement against all equity shares markets in India. It regularly conducts index maintenance checks. Therefore, this ensures that it is stable and working effectively. This can persist as a benchmark index of the Indian stock market. 

How is Nifty different from Sensex? 

Nifty and Sensex both are Indian stock market indices which depict the strength of the securities markets. Despite their similarity to the broad-based index, there is a difference between Sensex and Nifty.

Full-Form

  • The nifty derivation is from the word National Fifty. It is also known as S&P CNX Nifty
  • Sensex derivation is from the phrase Sensitive Index. It is also known as the S&P BSE Index.

Date of Commencement

  • NSE Nifty incorporation year is 1992. However, it commencement of its operations was in November 1994. 
  • BSE Sensex incorporation year is 1986. 

Operations

  • Index and Services and Products Limited (IISL), an NSE India subsidiary owns and operates Nifty.
  • The Bombay Stock Exchange (BSE) owns Sensex. BSE is also the largest trading platform in India. 

Location

  • Nifty is based on NSE. Its corporate office location is Exchange Plaza, Bandra Kurla Complex, Mumbai
  • Sensex is based on BSE. The corporate office location is at Dalal Street, Mumbai. 

Base Period

  • Nifty’s base period is 3rd November 1992
  • Sensex base period is 1978-1979

Base value

  • The nifty base value is 1000
  • Sensex base value is 100

Base Capital

  • Nifty base capital is Rs.2.06 trillion
  • Sensex does not have a base capital

Number of constituents

  • Nifty comprises the top 50 stocks traded on NSE
  • Sensex comprises the top 30 stocks traded on BSE.

Number of sectors

  • Nifty is a broad market index which covers companies across 24 sectors
  • Sensex covers companies across 13 sectors.

Companies

  • Nifty has 1600 companies listed
  • Sensex has 5000 companies listed.

As such, there is no significant difference between Sensex and Nifty. They both target the large cap stocks. Nifty is broader than Sensex as it has more number of large cap stocks listed. Also, Nifty has a more diversified portfolio in comparison to Sensex. One can even notice more trading happening on the NSE India platform.

Nifty 50 Index Companies (as of September 2020)

1. Tata Motors Limited26. Tata Consultancy Services Ltd.
2. Hindalco Industries Ltd.27. Britannia Industries Ltd.
3. Larsen & Toubro Ltd.28. Bharat Petroleum Corporation Ltd.
4. Titan Company Ltd.29. Bajaj Finserv Ltd.
5. Bharti Infratel Ltd.30. Cipla Ltd.
6. Adani Ports and Special Economic Zone Ltd.31. Reliance Industries Ltd.
7. Hero MotoCorp Ltd.32. Bajaj Auto Ltd.
8. HCL Technologies Ltd.33. Dr Reddys Laboratories Ltd.
9. Ultratech Cement Ltd.34. Tata Steel Ltd.
10. Indian Oil Corporation Ltd.35. IndusInd Bank Ltd.
11. Grasim Industries Ltd.36. Nestle India Ltd.
12. Tech Mahindra Ltd.37. Infosys Ltd.
13. JSW Steel Ltd.38. HDFC Bank Ltd.
14. Oil & Natural Gas Corporation Ltd.39. Shree Cement Ltd.
15. Zee Entertainment Enterprises Ltd.40. Mahindra & Mahindra Ltd.
16. UPL Ltd.41. Housing Development Finance Corporation Ltd.
17. Power Grid Corporation Of India Ltd.42. GAIL (India) Ltd.
18. Asian Paints Ltd.43. Axis Bank Ltd.
19. ICICI Bank Ltd.44. State Bank Of India
20. Wipro Ltd.45. ITC Ltd.
21. Hindustan Unilever Ltd.46. HDFC Life Insurance Co Ltd.
22. Coal India Ltd.47. NTPC Ltd.
23. Kotak Mahindra Bank Ltd.48. Eicher Motors Ltd.
24. Bajaj Finance Ltd.49. Sun Pharmaceutical Industries Ltd.
25. Maruti Suzuki India Ltd.50. Bharti Airtel Ltd.

Frequently Asked Questions

What are the equity Market timings?

Usually, the equity market timings are from 9:15 am to 03:30 pm, Monday to Friday. However, the commodity market is between 10:00 AM to 11:30 PM, Monday to Friday.

Published on October 5, 2020