What Is Nifty And How Nifty Is Calculated?

Investing in the stock market is nothing short of a rewarding roller-coaster ride. You're always on the hunt for high performing stocks that offer you greater returns and help you achieve portfolio diversification. And this is where Nifty enters the picture.

News headlines keep flashing nifty 50 charts every day, while expert investors use this term to analyse the stock market's performance. For a beginner, this is just another financial jargon, but investment in this flagship index lets you invest in 50 industry leaders at once! 

But what is Nifty, and what is Nifty 50? And what significance does it hold? This article will break down everything you need to know about Nifty and how is nifty calculated.

What is Nifty?

NIFTY refers to National Fifty and is a National Stock Exchange market index. Nifty 50 is a benchmark index of the weighted average of the country's top 50 large-cap companies listed on the NSE. It is one of the two national indices tracked by investors in India, the other being Sensex.

While there are 1300 stocks listed on the NSE, most investors – especially foreign investors interested in the Indian market – refer to the Nifty’s top 50 index to determine the stock market's performance.

How does Nifty’s index work?

Nifty’s top 50follows the stock market trends of the largest and the most liquid companies in India (blue-chip companies) across 12 different sectors of the economy. Some of these include -

• Information technology
• Consumer goods
• Telecommunications
• Financials services
• Entertainment and media
• Pharmaceuticals
• Fertilisers and Pesticides

Since an index fund replicates the movement of any underlying security, any changes that you witness in the Nifty 50 index are the changes in the stock price of the 50 companies that make up this index. Nifty also includes various sub-indices based on different sectors or asset classes.

How is Nifty calculated?

Stock market experts determine the Nifty 50 indices based on the free float adjusted and market capitalisation weighted method. This index level demonstrates the total market value of all stocks in the index for a specific duration. For the index, this base duration is November 3, 1995, and the base value of stocks is 1000. And the base capital is Rs. 2.06 trillion.

Before diving into how is nifty calculated, first understand what this process means.

• Market Capitalisation is the aggregate value of shares held by the company and its investors. Here, free-float market capitalisation indicates the total value of shares not owned by the company and are available for public trading.
• For calculation, experts use the weighted method wherein the component of each stock is assigned a weight based on the total value of outstanding shares in that stock.
• Next, to determine the total market cap of each stock, you need to multiply it with the Investible Weight Factor (the number of shares available for trading).

The formula for calculating index value is -

Market Capitalisation = Price x Equity capital

Free-Float Market Capitalisation = Price x Equity Capital x Investable Weight Factor

Index Value = Current market value / (1000 x Base market capital)

Where Current Market Value = weighted total market cap of all the 50 companies

And Base market capital = weighted aggregate market cap of the 50 companies in the base period

This NSE index share market is the benchmark against which all the equity share markets in India are measured. As a result, NSE conducts regular index maintenance checks to ensure that the index is stable and working effectively.

Moreover, stocks included in the Nifty’s top 50 capture about 65% of the float-adjusted market capitalisation in the NSE. Thus, it truly reflects the Indian stock market. 

How are Nifty’s stocks chosen?

When you invest in this flagship index, you park money in top companies countrywide and earn higher returns. To make sure you invest in the best-performing stocks, the index frequently churns out any low performing companies – in fact, 20 of the 50 stocks in 2010 were no longer a part of the Nifty in 2020.

That is why NSE follows strict eligibility criteria and reconstitutes the index regularly. Every six months, the NSE ranks various large-cap companies based on free-float market capitalisation and chooses 50 companies to be a part of the index.

NSE evaluates the 6-months performance of these stocks. Based on their performance and the company's eligibility, it adds or removes stocks in this list by giving prior notice to the respective companies. Following are the eligibility criteria for the flagship index listing -

• The company must be Indian and registered with the National Stock Exchange.
• The company's trading frequency should be 100% for the last six months.
• It should have a free-floating market capitalisation, 1.5 times higher than the smallest company on the index.
• The stocks must be highly liquid.
• Shares with Differential Voting Rights (DVR) are also eligible to be listed on the nifty index.

Apart from this periodic reconstitution, any changes in the structure of the company, mergers, acquisitions, suspension, or mandatory delisting also prompt the NSE index to revise the index.

To sum up

Now that you know what Nifty is or what is Nifty 50, investing in it will provide you with a safe gateway to the stock market and create wealth in the long term! Get started with your research with Tata Capital's Moneyfy app, compare investment options, learn what is nifty 50, and more. Download the app today!