Selecting a stock from the gigantic list of shares can be challenging; this is where a stock index comes handy. A stock index represents the overall health of the market. It can be used to compare the value of a stock over a period to calculate its performance. These features of a stock index make stock-picking easier. The overall trend of the market can be analysed using a stock index. There are two leading stock indices; Nifty is the index for National Stock Exchange (NSE) while Sensex is the index for Bombay Stock Exchange (BSE).
Nifty 50 is a combination of two words: National and Fifty. It comprises of weighted stocks of 50 of the largest Indian companies that are traded in NSE. It covers about 14 sectors and is one of the most actively traded contracts.
So, how is Nifty 50 calculated?
Nifty 50 is calculated by taking the weighted value of the 50 stocks listed on NSE and is based on free-float market capitalisation. The index value is calculated using market capitalisation and reflects the value of the stocks relative to the base period. The market value is calculated as the product of several shares and the market price per share.
Index value = Current market value / (Base Market Capital * Base Index Value)
As the value of Nifty is based on weighted cost, the companies with more massive stocks affect the value more than the companies with smaller capital.