What is Nifty, and how is it calculated?

Stock market indexes help investors understand market performance and subsets. Nifty is one such index. With Nifty, stocks reflect market segments and performance over time. Learn more What is Nifty and how it is calculated here.

Understanding Nifty

National stock market indexes indicate the overall market performance in the country. They are meant to support investment decisions. Nifty is one such index. It is one of the two in India. (The other, of course, is the Bombay Stock Exchange or BSE.)

It is also alternatively named CNX Nifty and Nifty 50. Nifty is like a barometer that assesses the market performance of the Indian stock market.

History and development of Nifty

The Nifty index was first conceptualized in 1992. One year later, the Securities and Exchange Board of India (SEBI) recognized it as a stock exchange unit.

The index was officially launched on 22 April 1996. From its very inception, Nifty has been an important financial product with an ecosystem of exchange and trade funds.

The NSE Indices Ltd entity owns and manages Nifty.

The importance of Nifty in the Indian capital market

The Nifty 50 index has played a key role in strengthening Indian capital markets over the years. It has helped develop an electronic trading interface that aligns with the standards of global markets.

What’s more, Nifty has multi-asset exchange platforms that support Foreign Direct Investment (FDI) in India. These platforms assist international investors with understanding and making investment decisions in India.

With the huge capital involved and exchanged, Nifty role in maintaining market integrity is of particular importance. Nifty fulfills this responsibility by developing effective regulations and managing risks.

The composition and calculation of Nifty

Nifty 50 stocks include the top 50 Indian companies that have a global presence. The performance of Nifty indicates the performances of these 50 companies.

Components of Nifty

The Nifty 50 index sets the criteria for the selection of the companies. The selection changes every six months. Companies that do not meet the criteria are eliminated from the Nifty 50 stock list.

Nifty picks up stocks that:

• Own appropriate trade volume (to ensure liquidity)
• Are available in future and option segments
• Are on the Nifty 50 stocks list for six months
• Belong to NSE-registered Indian-origin companies
• Are likely to have a trading frequency of at least 100% in 6 months
• Belong to companies that have differential voting rights

If any companies lack the criteria, the Nifty list is changed. Changes like acquisitions and mergers affect the listing.

In recent times, companies on the list include some of the biggest names—like TCS, Asian Paints, and Maruti Suzuki. These firms rank on the basis of their free-floating capital.

How Nifty is calculated

To calculate the index value, use the following formula.

Index Value = (Current Market Value/Base Market Capital) * 1000

That means it reflects the market cap of all the stocks in relation to a base period. This market cap is the free-float market capitalization.

The market cap is calculated by multiplying the share price with all equity. And the free-float market cap is the total market value of the shares available for public trading—that is, excluding those that the company or the government owns—multiplied by the Investible weight factor (IWF).

The IWF is a number that shows the share proportions traded by investors in the stock market.

So, to sum it up:

Free float market cap/ Base market capital = Share Price x Equity Capital x Investable Weight Factor (IWF)

The role of NSE in how Nifty is calculated

A team from NSE Indices Ltd. is responsible for managing the Nifty share index. It set up the Index Advisory Committee—the body that offers its expertise and guidance on large-scale issues concerning equity indices.

The share price of Nifty goes up or down on the basis of NSE calculations.

The Nifty 50 companies list is decided on the basis of these calculations every six months. The best-performing companies on the stock market are given higher ranks. Nifty also conducts surveys on the companies it lists.

Factors that affect Nifty

Now that you know how Nifty is calculated, let’s look at some of the factors that affect the index. The Nifty index value depends on a variety of factors. Things like inflation, changing interest rates, and global recessions can and do affect Nifty’s performance. When inflation rises, for instance, firms tend to put off expansion plans to avoid borrowing costs.

Using Nifty as an investment tool and as a market indicator

Nifty can be used as an investment tool that gives access to a diverse range of assets. One of the key things to as far as using Nifty as an investment tool is to study its price trend. Doing so can teach you a lot.

There are two ways to invest with Nifty as a tool.

One, you could buy stocks directly in the same percentage as their weightage in Nifty. The second option is to invest in Index Mutual Funds that track the index. The portfolios of such funds replicate the Nifty composition.

Nifty is as much a market indicator as it is an investment tool. More on this in the section below.

Relating Nifty performance to the overall market performance

The share price of Nifty is an indicator of different market conditions—the bulls, the bears, and the trading in a range.

A bullish market condition indicates there is a lot of trading going on. Market prices, therefore, will be higher and are expected to rise more. The opposite is true of a bearish condition. You can read more about the bulls and bears here. When the market is trading in a range, it means that prices are somewhat stable within a specific range.

Thus, by looking at Nifty, one can learn a lot about the market’s current and future performance.

Predicting Nifty movements based on market indicators

The market condition improves when the stock market index price is up. Besides, within the index, the higher-ranking stocks have better performance histories. So investors can use this knowledge to put their money into investments that have better price histories.

Nifty vs. Other market indices

In India, there are two major market indices: NSE and BSE. Let’s take a look a moment to compare the two.
A comparison with other market indices in India
BSE stands for the Bombay Stock Exchange. It has a more varied market, while NSE only includes a sample of 50 companies. Formed in 1875, BSE is a much older index. However, NSE is trusted more widely owing to the strict supervision of its listing.

Advantages and limitations of Nifty as a market indicator

One of the main advantages of Nifty is that your investments are more secure. This is because it lists a smaller number of the best performers and reviews the list every six months. Investments through mutual funds in Nifty can even be cost-effective. The disadvantage is that it might over-diversify your investments.

Understanding the suitability of Nifty for investment decisions

As an investor, you must look for funds or stocks that are highly liquid. And Nifty can help you narrow down your options. Because it selects companies on the basis of criteria such as liquidity. Thus, Nifty is very useful when it comes to making investment decisions

Incorporating Nifty into investment strategies

Now that you’ve understood how Nifty works and how it is calculated let’s take a minute to spell out how to incorporate Nifty into your investment strategy. If you choose a Nifty-related mutual fund, you must look at the liquidity and expense ratio.

Because Nifty is a guide to understanding the market, it is also easy to invest in stocks by relying on its trend patterns. If you choose this option, though, make sure you do plenty of research and stay safe.

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