What is Nifty50 and how is it calculated

Today’s economy focuses majorly on the markets of the capitalistic world. The stock market in particular has an incredible impact on the market itself and the economic conditions of multiple companies.

What is Nifty50 and how is it calculated

Exactly how does the Primary and the Secondary Market work

The primary market is the starting point for a company or individual to float their new stock to the public for the very first time. Shares and Stocks are handed a market value based on the consumer demands from this market. Here the companies directly deal with the buyer or trader. An example of the primary market is IPO, where private companies sell their brand new stocks to the public. Other examples are Rights offering, private placement, and public allotment.

The secondary market or the stock market is where investors trade between other investors, traders, and bondholders instead of the companies trading them. Someone who is an investor and has shares or stocks in a particular company can sell his shares at a price he wants to another investor. Bondholders too, sell bonds on this market to attain sizable profits because of the high coupon rate.

What exactly is Nifty50?

Nifty is a market index and the official benchmark index of the National Stock Exchange. There are two major stock exchanges in India, namely The BSE-Bombay Stock Exchange and The NSE-National Stock Exchange. Sensex would be the official index for the BSE. Nifty was started in 1996 and the word was a combination of the words National and Fifty, to resemble the weightage of India’s top 50 companies or top 50 equity stocks that are an active part of Nifty.

The stocks span across twelve different sectors of the Indian economy like Information tech, finance, telecommunications, pharmaceuticals, and other consumer goods. Nifty is owned by IISL or India Index Services and Products Ltd, which is a subsidiary of the NSE. It follows the trends of the most liquid and largest securities of India’s companies or the blue-chip companies. The indices of Nifty include Nifty50, Nifty IT, , and Nifty Next50.

Sectors of Nifty

Nifty is a diversified stock index that is meant to denote the ups and downs of the 12 main sectors making up the Indian economy. These sectors are Finance, Energy, Materials, Industrials, Consumer products, Pharma, Information Technology, Automobile, Media and Entertainment, Services, Telecom, and Real Estate. 

How stocks are chosen and replaced?

For inclusion of stocks, the security of it should have been traded at an impact cost of 0.50 percent or less on average in the last 6 months, for around 90 percent of the observations, according to NSE norms. A sturdy coming out from the company with an IPO is eligible only if it meets the criteria and its period, shortened to three months.

For a stock to be replaced, one of two reasons have to be met- A mandatory change like corporate action or delisting, or when a better candidate is ready to take its place on the index. If a company performs well however and fulfills the norms, it would get reinstated into the index again.

Some of the Top Companies listed under Nifty

Some of the top companies listed under Nifty 50 from July to December 2019 are:

  • Yes Bank (Banking)
  • Tata Motors (Automobile)
  • Ibull Housing
  • Finance (financial service)
  • Asian Paint (consumer goods)
  • Coal India Ltd (Energy and Mining)

How can the Nifty50 be calculated?

Nifty functions based on something known as the free-float market capitalization weightage method.  A mathematical formula is based to calculate the market capitalization. Equity capital is multiplied with a price to result in market capitalization. Equity capital is once more multiplied with IWF that is the factor determining how many shares are ready to be traded immediately in the market. The index is calculated daily by taking into account the present market value which is then divided by  base market capital and multiplied then by the Base value index (=1000).