NIFTY: The complete beginner’s introduction

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?

Nifty is the benchmark index created by NSE. This stock market index was designed by NSE in 1996 to be weighted average of top 50 (currently 51) stocks across 13 sectors of Indian stock market. Thus, it depicts a average sentiment of complete market.

In simple words, this is a weighted average of a collection of most actively traded stocks in 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)

The list of stocks currently in NIFTY 50 (January 2020):

These are the companies that are currently (Jan ’20) in the index:

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.
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.

Why there are 51 stocks when the name is 50?

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.

How is Nifty Calculated?

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 formula for calculating price index is –

Index value = Current Market Value (of all the stocks in Index)/ (Base Market Capital * 1000)

The method 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

  • 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.

National Stock Exchange (NSE)

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.

NSE introduced its (now) popular index – Nifty 50 in 1996 with 1995 as base year. Apart from Nifty, there are many other indexes by NSE. You can read the complete list here.

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.

Can we buy Nifty 50?

NIFTY 50 is an index. It is just an indicator of the increase in overall valuation of market and sentiment of the market.

But you can not buy or sell NIFTY index. You can only buy listed instruments like shares, options and futures in exchange.

So how to get the benefit of rise in Nifty?

There are currently two ways:

Futures(for traders):

What you buy or sell or hear other people trading about is Futures.

NIFTY future is a trading instrument whose price is based on NIFTY Index. This is tool used by traders to take benefit of short term movements of market indexes.

Index Funds (for investors):

The other option which is actually better for retail investor is to invest in Index Funds.

An index fund allows you to build a portfolio which is a copy of the index itself.

And in many ways, an index fund has actually performed better than other active mutual funds.

Active Fund vs Index Fund Which is better?

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