This article will tell the readers how Nifty 50 is calculated, along with the basics, including data on NSE and Nifty 50. Let us get on.
National Stock Exchange.
- National Stock Exchange is the leading stock exchange owned by the government of India. Unlike BSE, NSE is highly liquid and easier to trade in. Although the list of stocks in NSE is smaller than BSE, the trading volume of NSE is greater than BSE due to ease of trading.
- NSE was established in 1992 by R.H Patil. It was the first dematerialized electronic exchange in the country. NSE was the first exchange to provide a fully automated and screen-based electronic trading system in India. It is located in Mumbai, Maharashtra.
- It has a total market capitalization of around $2.27 trillion, making it the 11th largest stock exchange in the world.
- NSE facilitates easy transactions for all sorts of securities, be it options, futures, and so on. NSE is preferred for seasoned traders and people interested in day trading. However, the turnovers might not be great.
- NSE can easily handle around 160,000 orders per second, with unlimited ability to scale up at short notice on its investors’ demand due to its state-of-the-art platform and technology.
- National Securities Depository Limited (NSDL) is the central securities depository governed by the ministry of finance of India. It was introduced to store securities in demat form electronically. It was matched with NSE, and thus NSE became popular amongst domestic and foreign investors.
- Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest Indian companies listed on the NSE.
- It was established on April 21st, 1996. Nifty is a portmanteau, just like its brother Sensex. It is the mixture of the word National and Fifty (Since it represents the top 50 shares).
- It covers companies from 13 sectors of the Indian economy. The companies included in Nifty 50 are: Adani Ports and Special Economic Zone Ltd, Asian Paints Ltd, Axis Bank Ltd, Bajaj Auto Ltd, Bajaj Finance Ltd, Bajaj Finserv Ltd, Bharat Petroleum Corporation Ltd, Bharti Airtel Ltd, Britannia Industries Ltd, Cipla Ltd, Coal India Ltd, Divi’s Laboratories Ltd, Dr. Reddy’s Laboratories Ltd, Eicher Motors Ltd, Grasim Industries Ltd, HCL Technologies Ltd, HDFC Bank Ltd, HDFC Life Insurance Company Ltd, Hero MotoCorp Ltd, Hindalco Industries Ltd, Hindustan Unilever Ltd, Housing Development Finance Corporation Ltd, ICICI Bank Ltd, ITC Ltd, Indian Oil Corporation Ltd, IndusInd Bank Ltd, Infosys Ltd, JSW Steel Ltd, Kotak Mahindra Bank Ltd, Larsen & Toubro Ltd, Mahindra & Mahindra Ltd, Maruti Suzuki India Ltd, NTPC Ltd, Nestle India Ltd, Oil & Natural Gas Corporation Ltd, Power Grid Corporation of India Ltd, Reliance Industries Ltd, SBI Life Insurance Company Ltd, Shree Cement Ltd, State Bank of India, Sun Pharmaceutical Industries Ltd, Tata Consultancy Services Ltd, Tata Consumer Products Ltd, Tata Motors Ltd, Tata Steel Ltd, Tech Mahindra Ltd, Titan Company Ltd, UPL Ltd, UltraTech Cement Ltd, Wipro Ltd.
- Nifty 50 is used for purposes like benchmarking fund portfolios, index-based derivatives, and index funds. Just like Nifty 50, there are indexes in NSE used as benchmarks for companies listed on the NSE. These are the Nifty 100, Nifty 200, Nifty 500, and so on. (Imagine listing the names of companies listed in Nifty 500)
- Nifty 50 accounts for around 66.8% of the free-float market capitalization of the NSE’s total stocks. The total traded value of NIFTY 50 index constituents for the last six months ending March 2019 is approximately 53.4% of the traded value of all stocks on the NSE. (https://www1.nseindia.com/)
Let us move on to the main topic.
How is Nifty 50 calculated?
When it was first established, Nifty was calculated by a full market capitalization methodology (Just like Sensex). In the full market capitalization method, one evaluates the market capitalization by multiplying the total number of outstanding shares by the market price of that share.
On June 26th, 2009, calculating Nifty 50 changed from full market capitalization to free-float market capitalization. Nifty 50 is calculated by taking the weighted value of the 50 stocks listed on NSE.
Calculation using the free-float method is quite easy. The formula for the
free-float market capitalization is:
The market price of share × (Number of shares outstanding-Locked in shares)
Here, locked-in shares are those held by the people who control the company or shares that are restricted to the general public.
Example: Company ‘A’ has 50 million stocks outstanding, out of which 10 million are locked in. The market value of one share of ‘A’ is $80. Calculate the market cap using both – full-market method and the free-float method.
50 million × $80 = $4 billion
(50 million – 10 million) × $80 = $3.2 billion
Experts prefer the free-float market capitalization method to full market capitalization because free-float provides a better reflection of the stock market trends. It omits the restricted shares and calculates the market cap based on shares already floating in the market.
Using the free-float method will give you a smaller answer than while using the full market capitalization method because the full market method considers all the shares.
That is it, for now, guys; I hope you enjoyed reading my article and learned something new. In case you guys want to learn more about markets and their indices and more awesome stuff, take up some amazing stock market courses.
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