NIFTY: What is it & how is it calculated?
When you think about trading in Indian Market, or even investing in stock market in India, NIFTY is the word that you will read, right at the beginning. So, what’s NIFTY?
National Stock Exchange Fifty or Nifty is the market indicator of NSE. It ideally is a collection of 50 stocks but presently has 51 (explained later) listed in it.
In simple words, this is a weighted average of a collection of main stocks being currently traded in the market. And this is what it mainly denotes, the average growth (or mood) of the market. You get to know if market is bullish or bearish depending on the price movement of the NSE index.
It is also referred to as Nifty 50 and CNX Nifty by some as it is owned and managed by India Index Services and Products Ltd. (IISL). source (NSE India)
- NIFTY is calculated from the base year 1995 with the base value of 1000 as the initial value.
- From 12 sectors in the market, top 50 stocks are selected to be included in the calculation of NIFTY.
- The NIFTY 50 Index represents about 62.9% of the free float market capitalization of the stocks listed on NSE as on March 31, 2017.
The list of stocks currently in NIFTY 50:
|Adani Ports and Special Economic Zone Ltd.||Indiabulls Housing Finance Ltd.|
|Ambuja Cements Ltd.||Indian Oil Corporation Ltd.|
|Asian Paints Ltd.||IndusInd Bank Ltd.|
|Aurobindo Pharma Ltd.||Infosys Ltd.|
|Axis Bank Ltd.||Kotak Mahindra Bank Ltd.|
|Bajaj Auto Ltd.||Larsen & Toubro Ltd.|
|Bajaj Finance Ltd.||Lupin Ltd.|
|Bharat Petroleum Corporation Ltd.||Mahindra & Mahindra Ltd.|
|Bharti Airtel Ltd.||Maruti Suzuki India Ltd.|
|Bharti Infratel Ltd.||NTPC Ltd.|
|Bosch Ltd.||Oil & Natural Gas Corporation Ltd.|
|Cipla Ltd.||Power Grid Corporation of India Ltd.|
|Coal India Ltd.||Reliance Industries Ltd.|
|Dr. Reddy’s Laboratories Ltd.||State Bank of India|
|Eicher Motors Ltd.||Sun Pharmaceutical Industries Ltd.|
|GAIL (India) Ltd.||Tata Consultancy Services Ltd.|
|HCL Technologies Ltd.||Tata Motors Ltd.|
|HDFC Bank Ltd.||Tata Steel Ltd.|
|Hero MotoCorp Ltd.||Tech Mahindra Ltd.|
|Hindalco Industries Ltd.||UPL Ltd.|
|Hindustan Petroleum Corporation Ltd.||UltraTech Cement Ltd.|
|Hindustan Unilever Ltd.||Vedanta Ltd.|
|HDFC Ltd.||Wipro Ltd.|
|I T C Ltd.||Yes Bank Ltd.|
|ICICI Bank Ltd.||Zee Entertainment Enterprises Ltd.|
The fact sheet related to these stocks is available at NSE.
How 51 stocks?
The reason that 51 stocks are mentioned as current number (as on March’ 18) is due to both ‘Tata Motors Ltd‘ and ‘Tata Motors Ltd DVR‘ being used for calculation of the index.
But as their parent company is same, and the only difference is voting rights, they are taken as one. Thus the number in the list is 50, thus NIFTY 50.
Now the value of NIFTY is not simple average of all these stock. This is mainly due to:
- Difference in the size of the sectors
- Difference in the prices of different stocks in the list of NIFTY.
Hence, for NIFTY to be able to properly represent the average of the Indian Stock market, it needs to be adjusted for same. Hence the predefined calculation methodology.
The NIFTY 50 is computed using a float-adjusted, market capitalisation weighted methodology*, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period.
The methodology also takes into account constituent changes in the index and corporate actions such as stock splits, rights issuance, etc., without affecting the index value.
* Beginning June 26, 2009, the NIFTY 50 is being computed using a float-adjusted market capitalisation weighted method, wherein the level of the index reflects the float-adjusted market capitalisation of all stocks in the Index. ~NSE
National Stock Exchange (NSE)
All this talk about NIFTY is incomplete without knowing the organisation behind this index. It is National Stock Exchange or NSE for short.
The National Stock Exchange (NSE) is the leading stock exchange in India and the fourth largest in the world by equity trading volume in 2015, according to World Federation of Exchanges (WFE).
It began operations in 1994 and is ranked as the largest stock exchange in India in terms of total and average daily turnover for equity shares every year since 1995, based on annual reports of SEBI.
NSE is the one which pioneered the concept of electronic trading in India. This led to rapid adoptions of trading the market itself by people who were traditionally not trading earlier.
Along with NIFTY, NSE was the first exchange in the country to introduce Index Options and then Stock Options for trading in India. NSE also launched LEAP ( Long expiry options) for retail traders in 2016.
With launch of co-location servers and other technological products to brokers and other participating members, NSE has been instrumental in increasing the trading volume in Indian stock market.
This is what needs clarification. NIFTY 50 is an index. It is just an indicator of where market is overall as compared to base value and yesterday.
But you can not buy or sell NIFTY index.
What you buy or sell or hear other people trading about is Futures.
There is a separate article on Futures here ( link to be updated soon), though it can be explained in short here:
NIFTY future is a trading instrument whose price is based on NIFTY Index.