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What is the Bank Nifty and How Does it Work

11 Sep 2023

across the term “NIFTY bank” often enough, either in conversations or the media. Bank NIFTY, or NIFTY bank, is the National Stock Exchange’s (NSE’s) index of banking stocks. The Bank NIFTY is an Indian stock index which has the distinction of being one of the frequently traded indices in the market of Futures and Options in the banking sector. Among Indian investors and traders, this index has gained significance due to the high weightage and correlation it has with the NIFTY, the benchmark index of the NSE. 

What is NIFTY Bank?

In case you want to open a demat account and enter the world of stock investing, you can use the Bank NIFTY for determining what company stock to select. To grasp how the Bank NIFTY works, you should know a few key aspects of it first. Here is some information about the Bank NIFTY index: 

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  • The Bank NIFTY is an index comprising 12 banking company stocks. These stocks are traded on the National Stock Exchange (NSE). 
  • The Bank NIFTY index contains stocks of companies from the banking sector only.
  • As the Bank NIFTY includes only banking sector stocks, it is considered the most liquid and highly capitalised. 
  • The stocks which are listed in the Bank NIFTY belong to private and public sector banks. 
  • The Bank NIFTY was formed in 2003, and since then, investors, both retail and institutional, have been employing it as a useful benchmark for banking stock investment. 

How the Bank NIFTY Index is Used

How the Bank NIFTY index works is relevant if you wish to analyse it as a benchmark for your stock choices. Whether you want to enter the market of direct equity, or mutual funds or are thinking of subscribing to an upcoming IPO in the banking sector, Bank NIFTY can help you to determine whether an investment is prospective. Because this is a weighted index, market intermediaries as well as individual investors can make smart and informed choices. The index gives investors a solid perspective of the capital market performance of the banking industry. 

The Bank NIFTY index is often referred to for several purposes. For example, it is effectively used to benchmark fund portfolios, introduce fresh ETFs, know about other index funds and gain an understanding of more structured financial products. Although this index was launched in 2003, it considers 2000 as its base year. Bank NIFTY stock values and prices are shown in real time during normal trading hours of the National Stock Exchange. 

The Uses of the Bank NIFTY - More Information

To understand how the Bank NIFTY index works in greater detail, it is important to relate the index with the way it is used by investors. Here are some main takeaways of the working of the Bank NIFTY: 

The Index as a Benchmark

The Bank NIFTY is regularly used as a standard by mutual fund managers and investors. Its use as a benchmark of performance informs investors how banking stocks will perform in general and whether certain funds are likely to make gains. The main contention of investors in using Bank NIFTY as a suitable benchmark is to surpass Bank NIFTY returns. Therefore, if a fund exceeds the returns of the Bank NIFTY index, you could consider that fund as a positive investment. 

Say a mutual fund manager has invested in banking stocks. Further, assume that these have earned returns of 18% in a particular year, say 2020. Assume that the Bank NIFTY gives a return of 20% in 2020. In such a case, the fund in question has failed to outperform the Bank NIFTY index. If the mutual fund had provided returns amounting to 23%, the mutual fund would have outperformed the index. Typically, retail investors and mutual fund professionals use this index to evaluate how well investments are performing. 

The Bank NIFTY for Options Trading 

So, now you know what is NIFTY Bank, you may begin to grasp how it is used by investors and other financial professionals. Another use of this index has to do with options trading in the index. The index usually gives returns in the range of 2%-3%. With this in view, investors may engage in various strategies in options trading in Bank NIFTY options. 

The Stockpile of the Bank NIFTY

The stocks of the 12 banking companies listed in this index constitute well-known names in the banking and finance sector. Here are the top stocks listed in the Bank NIFTY index by their weightage: 

Technical Analysis with the Bank NIFTY

The Bank NIFTY index, in contrast to its broad share market counterpart, the NIFTY 50, lists only company stocks of the banking sector. Consequently, when investors wish to invest in the banking sector alone, they can use technical analysis based on the Bank NIFTY to gauge performance. Crucial to any investor, technical analysis provides investors with ways to analyze trends, identify patterns and evaluate the consistency and strength of trends. Charts with data on Bank NIFTY's performance are available for investors to study. Multiple timeframes are accounted for by these charts. Daily, weekly, monthly, quarterly, etc, charts are available for investors to analyze the performance of banking stocks. Commonly, weekly and monthly charts are used to determine stock performance. 

Final Lines on the Bank NIFTY

The banking and finance sector is one of the most invested in today. With more and more investors entering the markets of equity, and more options in terms of avenues to invest, it is easy to open a demat account and begin your foray into the share market. Even if you are considering an investment in an upcoming IPO, you may be interested in those arising from the banking sector. For instance, the Fincare Small Finance Bank IPO is due to come up at some point in 2023, and the index could be a deciding factor in whether you invest or not. 

Related Articles: Five trading rules to follow with Nifty at its peak | Six simple ways to beat the Nifty over the next five years | What explains the sharp gyrations in Nifty and Sensex post budget?

 

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