If you’ve ever followed stock market-related news, you’d find market analysts frequently talk about ‘NIFTY’ and how it rose or fell during a trading session. Being an investor or trader in the Indian stock market, you must know what it is, how it is constituted, and the role that it plays. Continue reading to learn about NIFTY and how it shapes the Indian stock market.
What is NIFTY?
The term NIFTY is a portmanteau of National Fifty and is the flagship broad market index of the National Stock Exchange. A broad market index is a portfolio of stocks from different sectors. It is one of the two primary broad market indices in India, with the other one being the SENSEX.
As the name itself signifies, NIFTY is a collection of 50 of the largest and the most liquid stocks listed on the National Stock Exchange. The constituents of the index are from multiple different sectors, 14 to be precise, and are viewed as a representation of the Indian stock market as a whole.
What does it take for a stock to appear in NIFTY?
Now that you know what NIFTY is, let’s take a quick look at what it takes for a company to be eligible to be a part of the index. A company has to satisfy the following eligibility criteria for it to even be considered by the NSE for the NIFTY index.
- The company must be registered and present in India and be listed on the National Stock Exchange.
- The stock of the company must be very liquid, which is determined by a metric known as impact cost. The impact cost of the stock must be equal to or lesser than 0.50% and must be present in at least 90% of portfolios over Rs. 10 crores for 6 months.
- The trading frequency of the company’s stock must be 100% over the past 6 months.
- The free-float market capitalization of the company’s stock must be more than 1.5 times that of the smallest company in the index.
- The stock of the company must also be available for trade in the derivatives segment (futures and options).
- Companies that have issued DVR (Differential Voting Rights) shares are also eligible.
No company has a permanent place in the NIFTY index. The index managers and advisory committee routinely reconstitute the index every 6 months. At the time of reconstitution, the index managers check if the present constituents of the index continue to satisfy all the laid out conditions and eligibility criteria. If any of the stocks that are part of NIFTY fail to satisfy even one criterion, it is removed from the index and replaced with another company.
What are the top constituents of NIFTY?
As of February 09, 2023, the top 10 constituents of the NIFTY index, the respective sectors that they operate under, and their weightage are as follows.
How does NIFTY work?
NIFTY, as an index, has a particular value. This value is computed using a special method known as the float-adjusted, market-capitalization method. The formula that’s used to compute the value of NIFTY is as follows.
NIFTY = Current market value of all of the constituents ÷ (Base market capital * 1,000)
Here,
The base market capital is ₹2.06 trillion, with the base year of NIFTY being 1995
Now, as the value of the companies appearing in the NIFTY index changes, the value of the NIFTY index also changes. That’s why when most of the companies present in the index rise, the NIFTY rises and vice versa. The movement of the NIFTY index is a great way to ascertain the general direction of the Indian stock market as a whole. This is one of the reasons why mutual fund houses constantly use NIFTY as a benchmark of the fund’s performance.
Conclusion
With this, you must now be aware of what the index is and how NIFTY works. Now, unlike stocks, you cannot directly invest in NIFTY. However, what you can do is trade in derivative contracts like futures and options of the index, where you can leverage the price movement of NIFTY to your advantage.
That said, if you’re a beginner investor or trader, it is not advisable to indulge in derivatives trading right away since it can be far too risky. Instead, you could start by investing in stocks and upcoming IPOs. Once you’ve gained enough experience, you could slowly progress to derivative trading.
Possessing a Demat and trading account is a mandatory requirement to participate in the Indian stock market. Without one, you cannot trade or invest in stocks or indices. So, if you wish to open a Demat account and a trading account, visit the website of Motilal Oswal today. The entire application process is digital and takes only a few minutes to complete.
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