How Nifty 50 Is Calculated? How does it affect stock prices?

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There is plenty of opportunity to grow wealth on the share market. In India, the NIFTY 50 index is a crucial barometer of NSE performance, reflecting the top 50 stocks. But have you ever wondered how NIFTY 50 is calculated? Calculating the Nifty index can help investors plan their investments. Investors can make informed decisions about sectoral allocations and stocks by understanding the composition and weighting of the index.

So, how NIFTY 50 is calculated? This index is calculated using float-adjusted and market capitalisation-weighted approaches, making sure that it accurately reflects the market value of stocks included in it. Let's take a closer look at how NIFTY 50 is Calculated in this article.

What Is NIFTY?

Before we understand how nifty 50 is calculated, let’s get an overview of the NIFTY concept. The NIFTY index was introduced by the National Stock Exchange. It is a blend of the words National Stock Exchange and Fifty that the NSE coined on April 21st 1996. Out of 1600 stocks, the NIFTY 50 showcases the top 50 equity stocks traded on the NSE. Additionally, it is a benchmark-based index and a flagship index of the NSE.

Information technology, financial services, consumer goods, entertainment and media, financial services, metals, pharmaceuticals, telecommunications, cement, automobiles, pesticides and fertilisers, energy, and other services are among the 12 sectors covered by these stocks.

Furthermore, one of the two national indices is NIFTY, the other is SENSEX, a product of the Bombay Stock Exchange. Moreover, the NIFTY 50 follows the trends and patterns of blue-chip companies, meaning the largest and most liquid entities in the Indian stock market.

 

How Is Nifty 50 Calculated?

A team of professionals at NSE Indices Limited manages the NIFTY share index. The Index Advisory Committee offers expertise and guidance on large-scale equity index issues.

NIFTY 50 indices are calculated using float-adjusted and market capitalisation-weighted data. Based on this method, the overall market value of all Nifty 50 stocks is calculated. Moreover, in the calculation of Nifty, November 3, 1995, is the base year.

  • The first step in figuring out how Nifty 50 is calculated is to figure out the market capitalisation of each company. Market value reflects the total value of all the shares of a company held by traders. Multiply the number of shares outstanding by the current market price to get the market capitalisation.
  • Next, multiply all the nifty 50 companies' market capitalisation with the (IWF) investable weight factor. The investable weight helps you find shares you can trade. However, it doesn't include shares owned by promoters, employees, or the government. 
  • After that, you multiply the market cap with IWF and weight to get a weighted free float market cap.
  • The last step in how NIFTY 50 is calculated is current market value is divided by the base market capital and then multiplied by 1000. 1995 is used as the base year for calculating the index value.

Here is the formula below on how nifty 50 is calculated

The index value is calculated as follows: Current market value / (1000 x the base market capital)

Which Stocks Are Picked For Nifty?

With this flagship index, you park money in the best companies in the country and earn higher returns. To ensure you only invest in the best stocks, the index gets rid of low-performing ones often - in fact, 20 of 50 stocks in 2010 weren't in the Nifty by 2020.

So, NSE has strict eligibility criteria and recreates the index regularly. Moreover, a list of 50 big-cap companies is chosen every six months by the NSE based on free-float market capitalisation.

The NSE looks at the stocks' performance over the past six months. Depending on their performance and eligibility, it adds or removes stocks from this list by giving them a heads-up. The following are the eligibility criteria for the flagship index:

  • It is essential that the company is Indian and registered with the National Stock Exchange.
  • The company's trading frequency should have been 100% for the last six months.
  • The company should have a free-floating market capitalisation that is 1.5 times that of the smallest company on the index.
  • A high level of liquidity is required for the stocks.
  • On the Nifty Index, shares with Differential Voting Rights (DVR) are also eligible for listing.

Conclusion

The Nifty 50 index tracks the performance of the top 50 stocks on the National Stock Exchange. The Nifty 50 index is calculated using market capitalisation, investable weight factor, and a reference year. The index is managed by NSE Indices Limited, which ensures that it accurately reflects market value. Those interested in investing in shares will benefit from understanding how Nifty 50 is calculated. Moreover, investing can be made easier with blinkX trading app, which provides resources to investors and offers tons of advantages to trade in the financial market.

 

How Nifty 50 Is Calculated FAQs

Nifty is calculated using a market capitalisation-weighted methodology. In other words, stocks with a higher market cap (i.e., ones with a greater value) have a greater impact on the index.

Based on their free-float market capitalisation, the top 50 large-cap companies are selected. A company's free-float market cap is calculated by multiplying its stock price by the number of shares readily available on the market.

NIFTY 50 is the best because it comprises large-cap companies listed on the NSE, the NIFTY 50 index includes some of the most stable stocks in a variety of sectors. As a result, there are significantly fewer risks regardless of when you invest

One of the most significant factors affecting this index's performance is the state of the Indian economy. The stock market is directly affected by economic indicators such as GDP growth, inflation rate, and interest rates.

Yes, NIFTY is safe for the long term.

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