Do you constantly come across the terms NSE, and Nifty without understanding what is being referred to? Here’s a guide to Nifty: India’s most popular benchmark index for equity shares.
What is Nifty in Share Market?
Nifty is a popular stock market index that has been introduced by the National Stock Exchange (NSE). ‘Nifty’ is a mix of the words “National Stock Exchange” and “fifty.” This is because NIFTY 50 is a flagship benchmark index by the NSE showcasing the 50 top-performing equity stocks that are being traded on the platform. There are a total of 1600 stocks trading on the NSE in a single day.
Now that we know what is Nifty 50’s goal – the stocks on its index span across 12 different sectors in the Indian economy. These include financial services, telecommunications, information technology, consumer goods, metals, entertainment and media, pharmaceuticals cement, fertilizers and pesticides, automobiles, energy, and more. Nifty follows the patterns and overarching trends of blue-chip companies. These are the largest and most liquid companies in India.
NIFTY 50 is one of two national benchmark indices in India. The other benchmark is SENSEX, which comprises the 30 highest performing stocks on the Bombay Stock Exchange. Nifty alone contains a large number of sub-indices. These are the NIFTY IT, NIFTY Next 50, and NIFTY Bank, each detailing separate asset classes, sectors, or segments.
Criteria for Eligibility for NIFTY Listing
To keep up with the latest stocks and trends, NIFTY is reconstituted every 6 months. During this time it considers the 6-month performance of stocks and checks for whether a company’s shares fulfill the eligibility criteria. NSE Indices Limites has a team of professionals that currently manage the NIFTY index.
This is an index Advisory Committee that offers guidance and expertise on large scale issues that relate to equity indices. Accordingly, the index managers will remove or include old or new stocks to the benchmark. With respect to new additions, companies are involved 4 weeks prior to the reconstitution. To be eligible for listing on NIFTY, the following criteria are necessary.
- The company must be registered with the National Stock Exchange (NSE) while being a domicile of the country.
- The company’s stocks should be highly liquid in nature. This is measured by the average of their impact cost. Impact cost is the price of trading a single security in relation to the index’s weight as seen through the company’s market capitalization. For a period of 6 months, the company’s impact cost should be less than or equal to 0.50% or lower with 90% of the sightings and analyses made on a portfolio over ₹10 crores.
- The trading frequency of the company should be 100% in the past six months.
- The company should have a free-floating average market capitalization. The market capitalization should be 1.5 times greater than the smallest company on the index.
- Any companies that have DVR shares, that is, shares with ‘Differential Voting Rights’ are also eligible to be a part of Nifty 50.
Apart from the 6-month reconstitution routine undertaken by Nifty, the index also goes through reconstitution when a company undergoes events like spin-offs, suspensions, compulsory delisting, or mergers and acquisitions. Additionally, Nifty also conducts a quarterly screening of each of its companies to keep track of whether they are adhering to the portfolio’s regulations for ETFs and Index Funds. SEBI, or the Securities and Exchange Board of India, keeps putting out new mandates that companies must adhere to, else they may be delisted from indices like Nifty.
How is NIFTY Computed?
Indices for Nift 50 are computed through a float-adjusted as well as market capitalization-weighted method. The level of index showcases the aggregate of the market value of shares present in it for a certain duration. This base duration for Nifty is November 3rd, 1995. The index’s base value is considered to be 1000 and its base capital is ₹2.06 trillion. The formula to calculate the index’s value is as follows:
Value of Index= Current market value / (1000 * Base Market Capital)
The formula is not the only means by which value is calculated. Changes in corporate-procedures such as stock splits, rights insurance and more are also taken into account. As NIFTY is a benchmark against which all equity share markets in India are considered, it regularly conducts index maintenance checks. This ensures it is stable and working effectively so that it can persist as a benchmark index for the country.