As a trader, investor or stock market enthusiast you should know, what is nifty? What is nifty 50 index ?and other major indices. You should be aware of how these indices works and what is idea behind its origin.
In this post you will be able to find all important aspects related to Nifty Index. So let us begin understanding them step by step.
What Is Nifty?
In simple terms Nifty is a market index launched by National Stock Exchange of India(NSE) on 22nd April, 1996. The word Nifty is derived from combining National & Fifty – as it consist of 50 actively traded stocks on NSE i.e. why it is also referred as NIFTY 50.
Out of total 1600 stocks that are listed on NSE, Top 50 stocks are part of this broad market index. The NIFTY 50 index is a well-diversified 50 companies index reflecting behavior of overall market conditions.
Nifty consist of large, liquid stocks listed on the Exchange. They serve as a benchmark for measuring the performance of the stocks or portfolios such as mutual fund investments.
You might have heard people asking how was nifty today? or how much was nifty up or down? Even while doing intraday trades or making any investment for future, one always check the nifty 50 overall condition, as it reflects the ongoing trend in the stock market.
In Case you are not aware of what is an index? Index simply means group of certain specific stock, how it is calculated and on what basis stocks gets chosen, will going to learn it later in this post. However let us first understand the idea behind an index.
What Is The Idea Behind an Index?
An Index moves based on the stocks it consist of, a stock moves majorly for two reasons, either there is a news about the company for e.g. a new product launch, or the closure of a factory or manufacturing, production units, etc.) or news about the country for e.g. Possibility of War, nuclear bombs, or a budget announcement, GDP data etc.).
The index work is to entirely capture the second part, i.e. the movements of the stock market as a whole (country news). Which means every stock is a combination of this two elements stock specific news and index news. This is get done by doing averaging.
So, when we take an average of returns on many different stocks, the individual stock news gets cancelled out.
For example it may happen on any given day, there would be good stock-specific news for a few companies and bad stock-specific news for others. If the index is good these stock specific news will get cancel out and the only thing left will be news that is common to all stocks.
The news that is common to all stocks is news about country (India) and this is what the index will capture.
One more thing need to keep in mind the averaging that takes place in an index is equivalent to diversification. Diversification cancels out individual stock fluctuations. From an investment perspective, diversification reduces risk. From an information perspective, diversification cancels out particular stock noise.
Now that we know the background of index, let us focus back on Nifty 50.
NIFTY 50 is one of the most actively traded contracts in the world. NIFTY 50 consist of diversified 50 stock index accounting for 14 sectors of the economy.
The NIFTY 50 is the flagship index on the National Stock Exchange of India Ltd. (NSE). The Index tracks the behavior of a portfolio of blue chip companies, the largest and most liquid Indian securities.
It includes 50 of the approximately 1600 companies listed on the NSE, captures approximately 65% of its float-adjusted market capitalization and is a true reflection of the Indian stock market.
Trading in derivative contracts based on NIFTY 50 the National Stock Exchange of India Limited (NSE) commenced trading in derivatives with index futures on June 12, 2000.
The futures contracts on the NSE are based on the NIFTY 50. The exchange introduced trading on index options based on the NIFTY 50 on June 4, 2001.
Additionally, exchange traded derivatives contracts linked to NIFTY 50 are traded at Singapore Exchange Ltd. (SGX) also known as SGX NIFTY and Taiwan Futures Exchange (TAIFEX).
Eligibility Criteria for Selection of Stock In Nifty 50 Index:
The company must be a domicile of India and registered with the National Stock Exchange.
The company should have a listing history of 6 months.
The average free-float market capitalization is at least 1.5 times the average free-float market capitalization of the smallest constituent in the index.
Companies that are allowed to trade in F&O segment are only eligible to be constituent of the index.
A company which comes out with an IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period.
For a stock to qualify for possible inclusion into the NIFTY 50, it has to reliably have market impact cost of below 0.50 % during the last six months for 90% of the observations when doing NIFTY 50 trades of two crore rupees.(Rs. 100 Million)
In case you do not know:
what is Impact Cost?
Suppose a stock trades at bid 99 and ask 101. We say the “ideal” price is 100. Now, suppose a buy order for 1000 shares goes through at 102. Then we say the market impact cost at 1000 shares is 2%.
If a buy order for 2000 shares goes through at 104, we say the market impact cost at 2000 shares is 4%.
Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index.
A professional team at NSE Indices Limited manages the Nifty index in share market. NSE Indices Limited has constituted the Index Advisory Committee (Equity), which provides guidance on small to large scale issues related to equity indices.
The NIFTY 50 is calculated using the free-float market capitalization weighted method wherein the level of the Index reflects the total market value of all the stocks in the Index relative to the base period November 3, 1995.
The base period for the NIFTY 50 index is November 3, 1995, which marked the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1000, and a base capital of Rs 2.06 trillion.
The total market cap of a company or the market capitalization is the product of market price and the total number of outstanding shares of the company.
Market Capitalization = Shares outstanding * Price
Free Float Market Capitalization = Shares outstanding * Price * IWF(Investible Weight Factors)
Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)
Base market capital of the Index is the aggregate market capitalization of each scrip in the Index during the base period. The market cap during the base period is equated to an Index value of 1000 known as the base Index value.
Note: Investible Weight Factors (IWF) as the term suggests is a unit of floating stock expressed in terms of a number available for trading and which is not held by the entities having strategic interest in a company. Higher IWF suggest greater number of shares held by the investors as reported under public category within a shareholding pattern reported by each company.
The IWFs for each company in the index are determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges.
Let us now talk about some data related to Nifty 50.
List Of Stocks In Nifty 50 Index:
The NIFTY Index is reconstituted every six months by checking the performance of a stock over such period. Depending upon a stock performance, the list might include or eliminate new/old stocks respectively.
Sectors Involved In Nifty 50 Index:
Top Stocks In Nifty 50 Index By Weightage:
Nifty 50 Returns Since Start(Inception):
Info Source NSE
In chart and table above, since inception it has provided about 9.33 % of return . QTD, YTD and 1 year returns are absolute returns. Returns for greater than one year are CAGR(compounded annual growth rate) returns.
Here is the link for CAGR Calculator
You might have already guessed by looking at the chart the recent fall due to the global pandemic Coronavirus. Otherwise the last five years returns were greater than the inception for Nifty50.
Nifty 50 Fundamentals:
Where You Can Get data for NIFTY 50?
Data for NIFTY 50 and other indices are available on the NSE website under Indices / Statistics
NIFTY50 Other Indices Returns From last 5 Years:
Needless to say the returns in some sector are negative due to recent fall because of the Coronavirus pandemic. Returns for the period up to one year are absolute returns. Returns for period greater than one year are CAGR returns.
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How can I buy Nifty50 Index?
You cannot directly buy Nifty 50 Index, however you can invest through mutual funds companies in a index fund which holds the equal weightage and replicates the return of nifty 50 index.
Else in order to buy the Index, you’ll have to buy the constituent 50 stocks in the same weightage as they hold on the Index mentioned above.
Alternatively, you can also buy Nifty Bees, the ETF (Exchange Traded Funds) on the Index which will replicate the performance of the Index.
Why Invest In Nifty50 Index?
The best thing about investing in good Index like Nifty50 as it helps in reducing the non-systematic risk.
Non-systematic risk include events such as a strike, plunging revenues, Higher financing cost, Declining profit margins, a natural disaster such as a fire, or something as simple as Management misconduct or slumping sales. Two common sources of unsystematic risk are business risk and financial risk.
However non-systematic risk can be easily diversified. First thing to remember, instead of investing all your money in one company, you can choose to diversify and invest in 3-4 different companies (ideally from different sectors). When you do so, unsystematic risk is drastically reduced. This is also known as portfolio building.
The NIFTY 50 Index which constitutes of 50 major companies, can easily help in diversifying your portfolio. These are premium companies with high market capitalization.
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I hope you know have a better understanding of What is Nifty and Nifty50? NIFTY is one of the two national indices, the other well know indices in India is SENSEX, which is a product of the Bombay Stock Exchange(BSE).
Other than nifty there are major key indices offered by NSE, List of which are given below:
You can invest or create a similar portfolio for your investment, depending upon your budget.
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How To Create a Portfolio?
It is easy to create a portfolio, which will reliably get the same returns as the index. i.e. if the index goes up by 5%, this portfolio will also go up by 5%.
Suppose an index is made of two stocks, one with a market cap of 1000 crore and another with a market cap of 3000 crore. Then the index portfolio will assign a weight of 25% to the first and 75% weight to the second.
If we form a portfolio of the two stocks, with a weight of 25% on the first and 75% on the second, then the portfolio returns will equal the index returns. So if you want to buy 1 lakh of this two-stock index, you would buy 25,000 of the first and 75,000 of the second; this portfolio would exactly mimic the two-stock index.
A stock market index is hence just like other price indices in showing what is happening on the overall indices.
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