Understanding The Derivation of NIFTY 50 [For Beginners]
Nifty – The wholly owned division of India Index Services and Products Limited (IISL) with core management being done as well brings in together the accumulation of 50 prominent companies of the leading 12 sectors of the Indian market in the form of the stock index of National Stock Exchange in India. Legal trading in NSE for equities and derivatives with future index began on 12th June 2000 and for index options, the trading began on 4th June 2001. The Nifty 50 is being used for setting up the benchmark for portfolios of funds, funds related to the index and derivatives.
The index of Nifty 50 itself shows around 65% of the float of capital on the stocks listed on National Stock Exchange (NSE) and the value of trade being done under nifty constitutes to more than 40% of all the stocks there in the NSE. The reason why nifty saw a surge in trading was the introduction of trade of derivatives under it. Until its introduction, the trading in equity was quite dominant in the market.
The computation of Nifty 50 takes place by the free float of the market capital and its weighing method and the representation of the levels is done by the average market value of the stocks in a particular base period. If particular corporate actions like the move of rights, splitting up the stocks and other relevant activities are done or take place than it is something which is taken into consideration and it is taken care that it does not affect the value of the index in any way.
There is a particular criterion under which it is necessary for the constituent stocks to fall in and be a part of the nifty50. They are:-
§ Firstly, most important are the liquidity of the stock. Here, liquidity is measured by the trade being done at an impact cost of less than 0.50% in the last six months and the observation being done for 90% times it should not have gone more than this and the value decided for this is Rs. 2 crores.
§ Secondly, a company should bring out an IPO through which the eligibility for being included in the index will be considered if it has fulfilled the norms of liquidity and other formalities.
The leading 12 sectors of the Indian market that are constituting the index of NSE are:-
2. Consumer Goods
4. Financial Services
11. Fertilizers & Pesticides
12. Media & Entertainment
The most important factor that runs the index is its maintenance. The IISL has constituted a committee which looks after the policy and guidelines for managing the index and its indices. Decisions related to the addition or alteration of companies is taken by the same committee. Between every six months, the index is being reviewed and the market is being informed four weeks prior if any changes are being decided to take place.