What Is Nifty and How It Is Calculated?

Many people think of investing in stocks as gambling, while the real scenario represents something else. It generally happens because of a lack of investors’ awareness and information about the investments, which provide consistent returns at somewhat low risk. Investors can acquire high returns after conducting proper research of India’s two stock market indices, specifically, Nifty and Sensex. In this article, let’s see what is Nifty and how it is calculated?

What is Nifty?

Nifty or Nifty 50 is a combination of two words: National Stock Exchange and Fifty. NSE created this term on 21st April 1996. India Index Services and Products (IISL) owns the Nifty. Nifty for 50 actively traded stocks of companies are represented by a single value and indexed in the country concerning market capitalization and liquidity. The companies are from various industries in India, such as banking services, pharmaceuticals, energy, telecommunications, information technology, automobiles, and others. Nifty 50 can be used for measuring funds performance, index derivatives, and tracking funds.

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How is Nifty Calculated?

What Is Nifty

For calculating Nifty 50 indices, the float-adjusted and market capitalization method is used. In this, the level index showcases the aggregate market value of the stocks present in it for a certain time. The specific base duration for the Nifty index is 3rd November 1995. The base capital is Rs.2.06 trillion. The index number of stocks is 1000.

The formula for calculating the Index Value is:

Market Capitalization = Price * Equity Capital

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

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

IWF (Investible Weight Factor) is a factor that is used to find out what number of shares are available for trading in the market. The value of stocks keeps regularly changing, so the index calculation is done in actual time.

Nifty is used to measure across all equity shares markets in India and make changes in the corporate system. The changes in the corporate system can be anything from rights issues, stock splits, etc. Nifty manages all the daily checks to control the index and ensure it is secure and working efficiently.

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Eligibility Criteria for Listing in Nifty

Investors have the advantage of selecting top stocks for investment and trading to enhance their returns. A stock needs to be eligible to become a part of the Nifty 50 index. The current performance of only the top companies is assessed throughout the last six months, and on the basis of that, the companies are excluded or included in the list of companies for trading on Nifty. 

Here is a list of Eligibility Requirements called for by the companies to be listed on Nifty: 

  1. The company needs to be an Indian Company and registered on the National Stock exchange.
  2. The stock of such a company also needs to be highly liquid. The average impact cost is reviewed for measuring the market liquidity of the stock of the respective company. The impact cost of a single security is an important factor for the index’s weight to the company’s market capitalization.
  3. For six months, the company’s impact must cost less than or equal to 0.50%, and the rest, 90% of the information, is made on a portfolio of Rs.10 crores.
  4. The trading frequency needs to be 100%.
  5. The free-floating average market capitalization needs to be 1.5 times greater than the smallest company on the index.
  6. Nifty 50 can also include stocks of the company with Differential Voting Rights (DVR) as eligible companies on the index.

Suspensions, mandatory delisting, mergers, demergers change the structure of the listed companies, which in turn induces an alteration in the Nifty 50. Nifty carries out an in-depth review of the companies listed on the index to ensure that they abide by all the regulations set by SEBI and other mandatory norms required.

List of Companies Listed on Nifty (as of September 2021)

  • NTPC Ltd
  • Bharti Airtel Ltd
  • Coal India Ltd
  • Oil & Natural Gas Corporation Ltd
  • Titan Company Ltd
  • HCL Technologies Ltd
  • State Bank Of India
  • Power Grid Corporation Of India Ltd
  • IndusInd Bank Ltd
  • Tata Motors Ltd
  • Tata Consultancy Services Ltd
  • Hindalco Industries Ltd
  • Infosys Ltd
  • Adani Ports and Special Economic Zone Ltd
  • Larsen & Toubro Ltd
  • UPL Ltd
  • Divi’s Laboratories Ltd
  • Hero MotoCorp Ltd
  • ICICI Bank Ltd
  • GAIL (India) Ltd
  • Indian Oil Corporation Ltd
  • Tech Mahindra Ltd
  • HDFC Life Insurance Co Ltd
  • Shree Cement Ltd
  • Eicher Motors Ltd
  • Bajaj Auto Ltd
  • Dr. Reddy’s Laboratories Ltd
  • Kotak Mahindra Bank Ltd
  • Mahindra & Mahindra Ltd
  • JSW Steel Ltd
  • Reliance Industries Ltd
  • Hindustan Unilever Ltd
  • Tata Steel Ltd
  • Wipro Ltd
  • SBI Life Insurance Company Ltd
  • Bajaj Finserv Ltd
  • Maruti Suzuki India Ltd
  • HDFC Bank Ltd
  • Sun Pharmaceutical Industries Ltd
  • Bajaj Finance Ltd
  • Housing Development Finance Corporation Ltd
  • ITC Ltd
  • Axis Bank Ltd
  • Asian Paints Ltd
  • Cipla Ltd
  • Grasim Industries Ltd
  • Britannia Industries Ltd
  • Ultratech Cement Ltd
  • Nestle India Ltd
  • Bharat Petroleum Corporation Ltd

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Greatest Breakthroughs of Nifty

Time FrameBreakthroughs
1993NSE was acknowledged as a stock exchange.
1996The Nifty 50 index was launched with an index value of 1000. 
2000Nifty reached 1800 as a result of the IT Boom.
2006It reached 3000 because of rapid growth in the service sector.
2007It reached 5000.
2014It reached 7,000 after the NDA had formed a government at the center.
2017It reached 9000 because of Strong FII participation.Then it reached 10,000 because of GST rollout, good monsoon, and strong corporate earnings. 
2018It reached the 11,000 mark because of falling crude oil prices and a positive update from the World Bank on the Indian economy.
2021It reached the 15,000 mark because of COVID 19 vaccine rollout.

Benefits of Investing in Nifty 50

Investors can get benefits by investing in Nifty50 stocks. You can invest in Nifty through Nifty index funds, ETFs, Nifty futures. Some benefits are as follows:

1. Low Investment Amount

Considering that index funds pool cash from various investors, mutual fund companies let you invest a smaller amount of money. You can start by investing a small amount of Rs. 500 a month through SIPs and can be a partial owner of all the 50 stocks of NIFTY 50 in the very same proportion as the index.

2. Consistent Returns in the Long Run

We all know that the stock market is volatile, Nifty will ultimately grow in the long run. Therefore, investment in Nifty would offer the investor consistent returns in the long run.

3. Lower Expense Ratio

ETFs or Nifty index funds are passively managed funds. Therefore, there is no need for fund managers, as in the case of mutual funds. This follows in a lower expense ratio for the investors.

4. Diverse Profile

ETFs and Index funds offer a diverse profile to the investors in each fund unit. Investors can retrieve solely other stocks and even other sectors through investment in ETFs and index funds.

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Final Words

So, to wrap it up, I hope that this article was helpful to you. If you plan to invest in the stock market, get in touch with our experts at The Thought Tree and join our Stock Market Course. We offer extensive programs which will allow you to choose the right investments and gain high returns.

Nifty plays a massive role in the Indian stock market. Investors can get consistent returns in the long run as the Nifty is one of the two benchmark indices of India. Nifty is regarded as a risk-free investment option for newcomers and also for experienced investors. Monitor Nifty to foretell the future of the Indian stock market.

FAQs

Q1. Is Investment in Nifty Safe?

Yes. Investment in Nifty through ETFs or Index funds is considered a safer investment choice than other investment options like mutual funds.

Q2. How much is the free-float market capitalization of stocks displayed on Nifty?

Nifty displays 65% of the free-float market capitalization of stocks that are listed on NSE.

Q3. How is Nifty different from Sensex?

Nifty and Sensex are indices of the stock market which show the strength of the market. The Nifty reflects the value of the National Stock Exchange (NSE), while Sensex is the stock market index for the Bombay Stock Exchange (BSE). Nifty is broader as it consists of 50 stocks while Sensex contains 30 stocks. 

Q4. Who manages Nifty? 

  • National Stock Exchange of India introduced the Nifty. 
  • India Index Service & Products Limited (IISL) manages the Nifty. 
  • Investors started trading on Nifty in 1994.

Q5. What percentage of trading frequency is required to get listed on Nifty?

A trading frequency of 100% is mandatory for the companies in the past six months to get listed on Nifty.