What is Nifty?
- May 8, 2018
- 3 min read
Nifty 50, usually referred to as Nifty, is the flagship stock market index for the National Stock Exchange (NSE). It is an indicator that tracks the behaviour and associated market sentiments for a portfolio of NSE’s largest and most liquid Indian securities. It captures the movement of nearly 65% of the capital invested in the NSE.
The index is owned and managed by India Index Services and Products Ltd. , which was instituted by NSE and S&P’s CRISIL, but is presently a subsidiary of NSE Strategic Investment Corporation Limited. The index has been trading on the market since April, 1996.
Some of the fundamental eligibility criteria for a company to become a part of Nifty 50 are:
The company needs to be listed on NSE.
The company must be domiciled in India.
The security must ensure that the average impact-cost is less than or equal to 0.50% for 90% of the observations for a portfolio of Rs.10 Crores, during the last six months.
The average free-float market capitalisation (more on this in the following paragraphs) for the company must be at least 1.5 times the average free-float market capitalisation of the smallest constituent in the index.
The security must have been traded on all trading days during the last six months.
So, in the conclusion of the definition of Nifty we can say that it is a metric that provides us with an understand as to where the capital in the market is flowing in general. If the Nifty value falls, it means money is moving out of the market, while if the value rises, money is flowing into the market.
A rising Nifty is a sign of a thriving and growing economy.
Now, let us turn out attention as to how we can calculate Nifty all by ourselves.
To do this, we need to know how to calculate the average free-float market capitalisation for a company. What this means is that how much money has been invested into the market by the investor for all the available investible stocks.
Investible stocks are those that in general are not held by promoters or government or any other individual that is not readily available or liquid in the market.
So as per the convention, all that’s that belong to the following category do not belong to the group of investible stocks:
Shareholding of promoter and promoter group
Government holding in the capacity of strategic investor
Shares held by promoters through ADR/GDRs
Strategic stakes by corporate bodies
Investments under FDI category
Equity held by associate/group companies (cross-holdings)
Employee Welfare Trusts
Shares under lock-in category
So let us take an example to calculate the average free-float market capitalisation for a company.
Let us assume a company ABC Inc. have 1000 shares in the market, each of which are priced at Rs.10.
The share distribution is as follows:
Holdings Shares
Shareholding of promoter and promoter group- 100
Government holding in the capacity of strategic investor- 25
Equity held by associate/group companies- 25
Employee Welfare Trusts- 75
Shares under lock-in category- 25
Total Non-Investible Share- 250
Total Available Share- 1000
Total Investible Share- 750
Thus, the investible weight factor (IWF) is:
IWF = 750/1000 = 0.75
Therefore, the free float market capitalisation = Shares outstanding * Price * IWF
Free Float Market Cap for ABC = 1000 * 10 * 0.75 =7500
Do note that the word average is included to indicate that the price and the IWF keep changing, so a time based average value is calculated for the above calculation.
We can similarly calculate the free float market cap for all the 1600 companies listed on NSE.
If we now arrange all these companies in the descending order of market valuation, that is from the highest to the lowest, the top 50 companies will be the constituents for Nifty50.
We now add up all the market caps, and compare it against a reference value to find out how the market has developed over the years.
We set this reference at 3rd of November, 1995, on which day the market cap was Rs. 2.06 trillion, and we dictated that the Nifty on that day, stood at 1000.
So, if Nifty with a base market cap of Rs. 2.06 trillion was at 1000, how much should it be for the total market cap of today’s Nifty 50 companies, is a simple case of the unitary method.
Therefore,
Nifty = (Current Market Value/ Base Market Capital) * Base Value Index (1000)
Now, you are more equipped to understand the sinuous behaviour of the market and its sentiments. You are one step close to becoming an intelligent investor.
For any query or feedback please write to us at insigniainvestments@gmail.com or head over to https://insigniainvestment.wixsite.com/home
Have a nice day. And stay invested!
Comments