Everything to Know about Nifty: Meaning, Eligibility Criteria, and Calculation

Asefa Hafeez

3 years ago

Table of Contents

Few investors find it challenging to choose the best-performing stocks as there are many options available. A stock market index can help investors compare a stock’s value over a period. In India, there are two leading stock indices — Nifty 50 index belonging to the National Stock Exchange (NSE) and the Sensex of the Bombay Stock Exchange (BSE).

Several indices under Nifty include the Nifty 50 index, Nifty Next 50, and Nifty IT. The following sections will cover everything you want to know about Nifty 50.

What Is the Meaning of Nifty?

Nifty is a word coined by NSE in 1996 by combining ‘National Stock Exchange’ and ‘Fifty’. Besides BSE’s Sensex, it is the only national index in the country. There are several NSE indices, each being a collection of 50 top-performing stocks in its respective index.

The Nifty 50 is NSE’s flagship index that tracks the behaviour of the largest and most liquid Indian securities. Nifty 50 is a free float-adjusted and a market capitalization weighted index.

In other words, the Nifty 50 represents a basket of the top 50 large-cap companies and overall price movements in Indian stock market. Investors can use this index to calculate the value of a portfolio holding and compare a stock’s performance. It is also used for investment products like index funds and index-based derivatives.

The Nifty 50 index has been trading since April 1996 and covers all 13 major sectors of the economy. NSE Indices Limited, formerly IISL (India Index Services and Products Limited), a wholly-owned NSE Strategic Investment Corporation Limited subsidiary, owns this index. It’s India’s first specialized company that focuses on an index as its primary product.

Eligibility Criteria for Companies for the Nifty 50 Index

There are a number of rules that decide which companies can be a part of the NSE Nifty 50 index. The following is a list of eligibility criteria for these companies:

Domicile companies: A firm must reside permanently in India, and its stocks must be traded on the NSE to be eligible.

Eligible stocks: Only securities which constitute the Nifty 100 index under NSE’s Futures and Options (F&O) segment are suitable for Nifty 50.

Impact cost: The company’s shares need to be highly liquid as per their average impact cost. This is the cost required for a security transaction in relation to its index weight. To be a part of Nifty 50, a stock needs to have an average impact cost of 0.50% for 90% of the last six months of observation.

Free float market cap: To be included in the Nifty 50 index, a company needs to have an average free-float market capitalisation of 1.5x that of Nifty 50’s smallest constituent.

Listed companies: A company that recently floated its shares via an IPO (Initial Public Offering) will be eligible for Nifty 50 if it fulfills the above two criteria. Moreover, it must meet its float-adjusted market cap requirements for three months.

Trading frequency: The company must have a 100% trading frequency in the last six months.

Differential Voting Rights (DVR): Equity shares with DVR are eligible for the Nifty 50 index, provided they meet the liquidity and market cap criteria. In addition, the free float of the company’s DVR must be 10% of its free-float market cap.

Top Listed Companies as per the Nifty 50

The Nifty 50 index gets reconstituted every six months with data from January to July and July to January of the next year. NSE undertakes reconstitution to add or remove companies under this list or for corporate events such as mergers, spin-offs, or delisting.

A team of professionals at NSE Indices Limited helps the Index Advisory Committee sort out their index every year. This is the latest list of Nifty 50 stocks as of May 18 2022:

How Is Nifty 50 Calculated?

The calculation of Nifty 50 is performed using the float-adjusted market cap method. The Nifty 50 index reflects the total market value of all stocks in a specific base period. This method considers all constituent changes in the index and corporate actions such as splits, rights issuances, etc.

The calculation of this index value is shown below:

Index value = Current Market Value / (Base Market Cap x 1000)

The total market capitalisation is the product of the current market price and the total number of outstanding shares of a company.

Therefore, Market cap = Total number of outstanding shares x Current share price

Free-float market capitalization = Market-cap (Total shares outstanding x current share price) x IWF

The following are the various factors to take into account for this calculation:

The base duration for this index reflects the market value of all stocks as of November 3, 1995. The Base Index Value on this date was 1000, while the Base Market Capital was Rs. 2.06 trillion.

The total market cap is calculated by multiplication with a free-float factor called Investible Weight Factor (IWF). Only the shares available for public trading are used to calculate IWF.

The Current Market Value refers to all stocks’ weighted aggregate market capitalization in the Nifty 50 index.

The Base Market Capital is the aggregate market cap of all 50 companies under the index.

Significant Milestones of NSE Nifty 50

Since its inception in 1992, the National Stock Exchange Ltd has always been a pioneer in implementing innovations in the Indian stock market. Today, NSE has a fully-integrated business that includes exchange listings, clearing, settlement, trading, technology solutions, financial education, etc.

The following are some of the most important milestones of the stock exchange.

1993-94: It was recognized as a stock exchange, launched its equity, debt, and cash market segments
1994-95: Ranked as India’s largest stock exchange in terms of total and average daily turnover
1995-96: It launched its flagship index, Nifty 50 index. Introduced dematerialized (Demat) securities.
1997-98: Established IIFL with CRISIL Limited
1998-99: Set up the NSEIT
1999-2000: Incorporated NSE Data & Analytics Ltd; Nifty touched 1800
2000-01: Launched Nifty 50 index options and single stock F&Os
2001-02: Launched Exchange Traded Funds (ETF)
2004-05: Launched bank index derivatives
2005-06: Established NSE InfoTech Ltd for IT research; Nifty reached the 3000 mark
2007-08: Introduced in Currency Futures, NOW platform and Securities Lending and Borrowing Scheme (SLBS)
2008-09: Launched the Mutual Fund Service System
2009-10: NOW platform was made available for mobile devices
2010-11: Allowed trading of F&Os on global indices
2011-12: Launched the EMERGE platform for SMEs
2012-13: Introduction of the New Debt Segment (NDS)
2013-14: Launched platforms like NBF II and NMF-II and India VIX index futures; the Nifty 50 index touched 7000
2014-15: Entered into an MoU with the London Stock Exchange Group.
2015-16: Launched a platform for sovereign gold bonds and an electronic book-building platform for debt securities.
2016-17: Promoted NSE IFSC in Gandhinagar; Nifty touched the 9000 mark
2017-18: It launched 3 hybrid indices and 72 fixed income indices and entered into MoU with Colombo Stock Exchange. Nifty touched the 10,000 mark.
2018-19: Nifty touched the 11,000 mark, signed a partnership agreement with Nasdaq, and launched commodity derivatives.
2019-20: Launched Nifty Bharat Bond Index Series, interest rate options on GOI bonds, and the RFQ platform.
2021: The Nifty 50 index touched the 15,000 mark.

Final Word

The National Stock Exchange is India’s largest stock exchange and trading platform. It owns and manages a portfolio of indices, including the flagship Nifty 50 index. Nifty 50 has a portfolio of the 50 best-performing stocks on the NSE. It is an essential tool for creating index-based derivatives and index funds. Moreover, it serves as a benchmark for Indian stocks.

Frequently Asked Questions

What is a stock market index?

A stock market index measures the performance of the entire country’s market or a sub-set of it. It comprises a selected group of stocks that reflects the state of the market. The grouping can be done based on the type of industry, company size, or market capitalization.

What are the various types of stock market indices in India?

The following are some of the standard indices in India:

- Benchmark indices like BSE Sensex and Nifty 50 for the overall market,
- Broad-based market indices like BSE 100, BSE 500, Nifty Next 50, etc.
- Market cap-based indices such as BSE Smallcap, Nifty Small Cap, BSE Mid Cap, Nifty Mid Cap
- Sectoral/industry-specific indices like BSE Bankex, Nifty IT, Nifty FMCG, Nifty Auto, etc.

What are the uses of a stock market index like NSE Nifty 50?

The following are some of the benefits of stock market indices:

- Investors can use them to check the best stocks in different categories.
- It reflects the investor sentiment in the overall market and specific sectors.
- An index reflects the overall performance of the market or a sector.
- It is essential for passive investments like index funds and ETFs.
- Investors can compare a stock’s performance against its benchmark.

How can you invest in NSE Nifty 50 stocks?

You can check the Nifty 50 index and invest in top-performing companies directly in the same percentage as their weightage. Another way to invest is using Nifty derivative contracts like futures and options, which use the index as an underlying asset.

Finally, you can invest in passively-managed index funds and ETFs, where fund managers invest by tracking the index. These are low-cost options for exposure to equities.

What is the meaning of the word free-float market capitalization?

The word ‘free-float’ denotes the actual number of stocks available in the market for the public. In the free-float market capitalization method, only the available shares for trading are used to compute the market cap instead of all outstanding shares. That is why this number is always smaller than the market capitalization.

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What Is the Meaning of Nifty?

Eligibility Criteria for Companies for the Nifty 50 Index

Top Listed Companies as per the Nifty 50

How Is Nifty 50 Calculated?

Significant Milestones of NSE Nifty 50

What is a stock market index?

What are the various types of stock market indices in India?

What are the uses of a stock market index like NSE Nifty 50?

How can you invest in NSE Nifty 50 stocks?

What is the meaning of the word free-float market capitalization?

Interested in how we think about the markets?