What is Nifty and How it is Calculated?

February 14, 2020

Nifty: Decoding Its Meaning and Significance

The term "Nifty" is a portmanteau of two words, namely "National Stock Exchange" and "fifty." Essentially, it's an abbreviation for the "National Stock Exchange Fifty." The Nifty represents a collection of the top-performing 50 equity stocks actively trading within the index. It's interesting to note that while it's referred to as Nifty50, it currently comprises 51 stocks. Therefore, you may also encounter terms like "Nifty50" or "CNX Nifty" in the financial context.

Understanding What an Index Is

A stock index serves as a yardstick to measure changes within the stock market. It provides insights into price movements and overall market performance. To create an index, a selection of stocks sharing common characteristics is grouped together. This grouping can be based on industry type, total market capitalization, or company size.

The value of a stock market index is calculated using the values of the underlying group of stocks. Any fluctuation in the value of these underlying stocks directly impacts the value of the index. In essence, the index is an indicator of market changes, reflecting overall market sentiment and price movements. It is an essential tool for investors and financial managers, allowing them to assess portfolio value and compare performance with benchmark indices.

In India, there are various standard indices, including benchmark indices like NSE Nifty and BSE Sensex, broad-based indices like Nifty 50 and BSE 100, market capitalization indices like BSE Smallcap, BSE Mid Cap, Nifty Small Cap, and Nifty Mid Cap, as well as sectoral indices such as the Nifty FMCG index, Nifty Bank index, Nifty IT, and Nifty Auto, among others.

Exploring Nifty 50 and Its Sectors

Nifty 50 represents various sectors of the Indian economy, including automotive, engineering, metals and mining, banking and finance, food and beverage, oil and gas, cement and construction, technology, pharmaceuticals, chemicals, manufacturing, retail and real estate, consumer durables and non-durables, media, and telecom.

It closely follows the patterns and trends of blue-chip companies, which are the largest, most liquid companies in India. Nifty also includes sub-indices based on distinct asset classes, sectors, or segments, such as NIFTY IT, NIFTY Next 50, NIFTY Bank, NIFTY Small Cap, and more. Additionally, Nifty boasts an extensive listing of 1600 companies.

NIFTY 50 is a benchmark index managed by the National Stock Exchange (NSE), a prominent stock exchange in India. It serves as one of the two national indices, with the other being Sensex, which is a product of the Bombay Stock Exchange (BSE).

Nifty Index Composition

The composition of the Nifty index is subject to reconstitution every six months to reflect the latest stock performance. This reconstitution evaluates a company's performance over a six-month period to determine if it meets the eligibility criteria for inclusion or exclusion from the index. Companies are notified four weeks in advance in case of any changes.

The eligibility criteria for Nifty index listing encompass the following:

• The company must be registered with the National Stock Exchange and must be Indian.

• The stock's liquidity, assessed by the average impact cost, should be less than or equal to 0.50% over six months, or lower with 90% of observations for a portfolio of Rs.10 crores.

• The company's trading frequency should be 100% for the last six months.

• The free-floating average market capitalization must be 1.5 times greater than the smallest company on the index.

• Companies with Differential Voting Rights (DVR) shares can also qualify for the Nifty 50 Index.

Periodical routine reconstitution is supplemented by ad-hoc reconstitution when companies undergo significant events such as spin-offs, mergers, acquisitions, suspensions, or compulsory delisting. Nifty also conducts quarterly screenings to ensure that companies adhere to regulatory mandates set by the Securities and Exchange Board of India (SEBI). Non-compliant companies may face delisting from the indices.

Calculation Method for Nifty 50

Nifty 50 is calculated using the float-adjusted and market capitalization method. The index's base period is November 3, 1995, with a base value of 1000 and a base capital of Rs. 2.06 trillion. The index value is computed by dividing the current market value by (1000 times the base market capital). The Investable Weight Factor (IWF) is a critical component in determining the number of shares available for trading, and index calculations are performed in real-time to reflect daily stock price changes and corporate events such as stock splits and rights issues.

Nifty serves as a benchmark for assessing the performance of all equity share markets in India. Regular index maintenance checks ensure its stability and effectiveness as a benchmark index in the Indian stock market.

Distinguishing Nifty from Sensex

While both Nifty and Sensex are Indian stock market indices reflecting the strength of the securities markets, they do have differences, such as their full forms, inception dates, operators, base periods, values, number of constituents, number of sectors, and companies listed. Here's a comparison:

• Full Form: Nifty stands for "National Fifty" (S&P CNX Nifty), whereas Sensex represents the "Sensitive Index" (S&P BSE Index).

• Inception Dates: Nifty was incorporated in 1992 and began operations in November 1994. Sensex was incorporated in 1986.

• Operators: Nifty is owned and operated by the National Stock Exchange of India, while Sensex is owned by the Bombay Stock Exchange (BSE).

• Base Period: Nifty's base period is November 3, 1992, with a base value of 1000 and a base capital of Rs. 2.06 trillion. Sensex's base period dates back to 1978-1979, with a base value of 100.

• Number of Constituents: Nifty comprises the top 50 stocks traded on NSE, while Sensex includes the top 30 stocks traded on BSE.

• Number of Sectors: Nifty covers companies across 24 sectors, whereas Sensex covers companies across 13 sectors.

• Companies Listed: Nifty has 1600 companies listed, while Sensex includes 5000 companies.

In summary, although Nifty and Sensex both focus on large-cap stocks, Nifty is broader and more diversified than Sensex, with a higher number of large-cap stocks. Moreover, Nifty experiences a greater volume of trading on the NSE India platform.

Note: The list of Nifty 50 Index Companies as of September 2020 is included for reference.

Frequently Asked Question: What are the equity market timings? The equity market typically operates from 9:15 AM to 3:30 PM, Monday to Friday. In contrast, the commodity market trades between 10:00 AM and 11:30 PM, Monday to Friday.