Understanding How is Nifty 50 Calculated: At the start of this new Year 2021, the Nifty touched the new height of 14,000 points for the first time ever. A good sign for the Indian markets as they keep soaring higher. But have you ever wondered how the index value was arrived at?
Today, we discuss the calculation of one prominent index in Indian markets called the Nifty 50. Here, we’ll discuss How is Nifty 50 Calculated and also look into the constituents of Nifty50. Let’s get started.
What is Nifty 50?
An Index is basically the stock exchange creating a portfolio of the top securities held by it. Indexes have always played an important role for both investors and companies by offering a reliable benchmark. Investors may use it to compare the performance of the index vs. their portfolio and the management of a company may use it to judge the performance of their company’s stock.
Indexes have also been used as an investment strategy where Investment Managers just set up their fund portfolios to simply track the index in an attempt to gain similar market returns. Indexes play an important role as they also stand in the representation of a country’s market and economy.
Nifty is derived from ‘National’ (National Stock Exchange) and Fifty. The Index was founded in the year 1992 and began trading in 1994. It is owned and managed by the India Index Service and Products (IISL). The Nifty 50 is a broad market index that acts as an indicator of market movements.
As the Nifty 50 includes the biggest Indian companies it captures 65% of the float-adjusted market capitalization of the NSE. It is therefore considered a true reflection of the Indian stock markets.
How is Nifty 50 calculated?
The Nifty 50 index is calculated using the Float-adjusted and Market Capitalization Method . This method reflects the total market value of all the 50 stocks in the index relative to the base period. The base period for the Nifty 50 is taken as November 3, 1995.
The First step includes the calculation of the Mcap of all the companies. This represents the total value of all the shares of a company held by investors in the market.
Market capitalization = (Shares Outstanding) x (Current Price)
The Second step includes multiplying the Mcap with the Investable Weight Factor (IWF). The Investible weight is a factor used to determine the shares available for trading. only considers shares that are available for public trading. This excludes shares held by company promoters, government, shares given to employees, etc.
Free-float Market Capitalization = (Market capitalization) x (I nvestable Weight Factor(IWF))
Third Step . Here, the Free Float Market Cap is then multiplied by the weight assigned to the individual stock.
Therefore the calculation for an individual stock would look as follows
Weighted Free Float Market Cap = (Market Cap) x (IWF) x (Weight)
Fourth Step . We now divide the current market value with its base value from 1995 in order to arrive at the value of the Index. The Current Market Value is the sum total of the Weighted Free-float Market Cap of all the stocks. The Base Market Capital is taken from 1995 which stands at Rs. 2.06 trillion.
Index Value = (Current Market Value/Base Market Capital) * 1000
Meet the Nifty 50 Stocks
|1||Reliance Industries Ltd.||OIL & GAS||12.94%|
|2||HDFC Bank Ltd.||FINANCIAL SERVICES||8.55%|
|4||ICICI Bank Ltd.||FINANCIAL SERVICES||7.11%|
|5||Housing Development Finance Corporation Ltd.||FINANCIAL SERVICES||5.68%|
|6||Tata Consultancy Services Ltd.||IT||4.89%|
|7||Kotak Mahindra Bank Ltd.||FINANCIAL SERVICES||3.53%|
|9||Hindustan Unilever Ltd.||FMCG||2.88%|
|10||Larsen & Toubro Ltd.||CONSTRUCTION||2.72%|
|11||State Bank Of India||FINANCIAL SERVICES||2.58%|
|12||AXIS Bank Ltd.||FINANCIAL SERVICES||2.43%|
|13||Bharti Airtel Ltd.||TELECOM||2.39%|
|14||Bajaj Finance Ltd.||FINANCIAL SERVICES||2.08%|
|15||Asian Paints||CONSUMER DURABLES||1.76%|
|16||Maruti Suzuki India Ltd.||AUTOMOBILE & AUTO COMPONENTS||1.63%|
|17||Mahindra & Mahindra Ltd.||AUTOMOBILE & AUTO COMPONENTS||1.51%|
|18||HCL Technologies Ltd.||IT||1.49%|
|19||Sun Pharmaceutical Industries Ltd.||HEALTHCARE||1.30%|
|21||Tata Motors Ltd.||AUTOMOBILE & AUTO COMPONENTS||1.07%|
|22||Power Grid Corporation of India Ltd.||POWER||1.05%|
|23||Tata Steel Ltd.||METALS & MINING||1.01%|
|25||Bajaj Finserv Ltd.||FINANCIAL SERVICES||0.96%|
|26||UltraTech Cement Ltd.||CONSTRUCTION MATERIALS||0.94%|
|27||Tech Mahindra Ltd.||IT||0.91%|
|28||Nestle India Ltd.||FMCG||0.90%|
|30||Oil And Natural Gas Corporation Ltd.||OIL & GAS||0.85%|
|31||JSW Steel Ltd.||METALS & MINING||0.79%|
|32||Dr. Reddy’s Laboratories Ltd.||HEALTHCARE||0.77%|
|33||IndusInd Bank Ltd.||FINANCIAL SERVICES||0.75%|
|34||HDFC Life Insurance Co.||FINANCIAL SERVICES||0.74%|
|35||Grasim Industries Ltd.||CONSTRUCTION MATERIALS||0.72%|
|37||Hindalco Industries Ltd.||METALS & MINING||0.71%|
|38||Adani Port and Special Economic Zone Ltd.||SERVICES||0.70%|
|39||SBI Life Insurance Co.||FINANCIAL SERVICES||0.70%|
|40||Bajaj Auto Ltd.||AUTOMOBILE & AUTO COMPONENTS||0.70%|
|41||Divi’s Laboratories Ltd.||HEALTHCARE||0.67%|
|42||Tata Consumer Products Ltd.||FMCG||0.61%|
|43||Britannia Industries Ltd.||FMCG||0.59%|
|44||Coal India Ltd||OIL & GAS||0.56%|
|45||Eicher Motors Ltd.||AUTOMOBILE & AUTO COMPONENTS||0.56%|
|47||Hero MotoCorp Ltd.||AUTOMOBILE & AUTO COMPONENTS||0.51%|
|49||Bharat Petroleum Corp. Ltd.||OIL & GAS||0.43%|
|50||Shree Cement Ltd.||CONSTRUCTION MATERIALS||0.37%|
The value of the index changes on a real-time basis in relation to changes in the stock price. Over time older companies that fail are replaced by newer companies that satisfy the requirements of the Index. The calculation shown above is restricted to the Nifty. Other Indexes like the Sensex use different base periods, base values, and are computed differently.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.
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An index is basically the stock market, which creates a portfolio of the best securities it holds. Indices have always played an important role for investors and companies in providing the right level of trust.
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Indices are also used by investment managers as an investment strategy in setting up their financial portfolios to monitor the index in an effort to achieve similar market returns. Precisely.