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What is NIFTY?

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Synopsis:

Nifty or National Stock Exchange Fifty is a key stock market index, comprising the top 50 companies listed on the National Stock Exchange by their free-float market capitalisation. Some of the top constituents of Nifty include Wipro, Tata Motors, TCS, Apollo Hospitals, Power Grid Corporation, HCL Technologies, Tata Steel, etc. All these companies are the leaders in their industry. Hence, Nifty is also seen as a barometer of the Indian economy. Investors can gain a lot by understanding the calculation of Nifty, how it moves up and down, and the factors behind its daily movements.

NIFTY is a famous stock market index in India, which comprises the stocks of the top 50 companies by market capitalisation. The daily movements in Nifty reflect the expectations of investors from these 50 companies. As these are large enterprises, which are leaders in their sectors, Nifty is also seen as a barometer of the Indian economy. Now, let’s discuss the meaning of Nifty in detail.

What is the Meaning of NIFTY? 

NIFTY, which stands for National Stock Exchange Fifty, is one of the most popular stock market indices in India. It is based on the stock prices of the top 50 companies listed on the National Stock Exchange (NSE).

Therefore, the index Nifty is often seen as an indicator of the performance of the larger economy in the country. If the top 50 companies which comprise Nifty perform well, Nifty’s value soars. On the other hand, when these companies do not perform well, Nifty declines. Hence, by tracking Nifty on a regular basis, we can figure out how these companies are doing and also how they are expected to perform in the near future. Having learnt what Nifty is and its meaning, let’s delve deeper into this topic.

How Does NIFTY Work?

  • NIFTY is based on the stock prices of the top 50 companies in India that are listed on the NSE.

  • To calculate NIFTY, the free-float capitalisation of those 50 companies is taken into account.

  • To put it simply, free float means shares that ordinary people can buy.

  • Every day, NIFTY moves up or down based on how traders and investors expect the companies comprising it to perform.

  • When we say that the stock market is up, we mostly mean that NIFTY is up and when we say that the market is down, we mean NIFTY is down.

Eligibility Criteria For NIFTY Index Listing: What does it take for a stock to appear in NIFTY?

For a stock to be included in NIFTY, it has to fulfil the following criteria:

  • A stock must be listed on the NSE. Moreover, people should be able to trade the stock in NSE’s futures and options segment. 

  • From all the companies listed on the NSE, the top 50 companies based on their free-float market capitalisation are considered in NIFTY.

  • For a stock to be considered in NIFTY, it must have high trading volume in the sense that people should be able to buy and sell it easily.

  • NIFTY’s constituent stocks keep on changing. Every year in June and December, a rebalancing of NIFTY takes place. The stocks that have witnessed a decline in their market cap or are de-listed are removed from NIFTY. Their place is taken by emerging stocks that have witnessed an increase in their market cap.

What Are The Top Constituents of Nifty: Top Companies Listed Under Nifty

These are the top constituents of Nifty: Wipro, Tata Motors, TCS, Apollo Hospitals, Power Grid Corporation, HCL Technologies, Tata Steel, BPCL, ICICI Bank, Nestle, Infosys, State Bank of India, Kotak Mahindra Bank, HDFC Bank, Britannia, Hero Motocorp, and Reliance Industries.

Calculation of NIFTY

NIFTY’s calculation is explained below:

  1. First, we calculate the free float market capitalisation of 50 stocks comprising NIFTY. For this, we multiply the share price of a company as of today by the number of its shares available to be purchased by the general public.

  2. Then, we add the market cap of all these 50 stocks.

  3. Then, we divide the cumulative market cap of 50 stocks with their cumulative market cap on November 3, 1995, which is the base period.

  4. Then, we multiply the value we have arrived at in the previous step by 1,000 because that is considered to be the base value.

Now that we have explained the calculation of Nifty, let’s move to other aspects related to it.

Major Milestones of NIFTY

The following points explain the major milestones in the journey of NIFTY:

a)     With a base value of 1,000, NIFTY started its journey in November 1995.

  • NIFTY took slightly more than 9 years to reach the value of 2,000 on December 14, 2004.

  • The next 1,000 points were achieved much sooner, as the index took just over a year to reach the level of 3,000 on January 31, 2006.

  • Then, within 12 months, NIFTY reached 4,000 on December 4, 2006.

  • The economy was growing fast in those days and hence NIFTY continued to soar.

  • It reached 5,000 on September 27, 2007 and hit 6,000 on December 11, 2007.

  • The next 1,000 points were an uphill task, as Nifty took 6.5 years to hit the 7,000 mark. Then, in just four months, it jumped to 8,000 on September 1, 2014. 

  • NIFTY continued its upward journey and reached 10,000 on July 26, 2017. It took NIFTY almost 22 years to hit the 10,000 mark.

  • However, it jumped the next 10,000 points in just over six years, as NIFTY reached 20,000 on September 11, 2023. Since then, NIFTY has continued its upward trajectory and it reached the mark of 24,000 sometime in June 2024.

Notable Highs in the History of NIFTY

The notable highs of NIFTY in its recent history are explained below:

  • In 2020, the market first declined due to the outbreak of COVID-19, but as the number of COVID-19 cases fell throughout the year, NIFTY crossed 14,000 by December 2020.

  • In 2021, NIFTY continued to move up and reached an all-time high of around 18,604 on October 19, 2021. This was due to strong earnings of Indian companies, global economic recovery after COVID-19, and greater participation of retail investors, as many stockbrokers launched their mobile broking apps.

  • In 2022, the global economy remained volatile due to the Russia-Ukraine conflict, but still, the Indian market received significant inflows from foreign institutional investors. Hence, NIFTY reached the mark of 18,887 on December 1, 2022.

  • In 2023 and in 2024 so far, NIFTY has mostly continued its upward trajectory due to better economic growth in India than in other countries. The index reached the level of 24,000 in June 2024.

Notable Lows in the History of NIFTY

  • The outbreak of COVID-19 and resultant shutdowns slowed the global and Indian economy in the first few months of 2020. Consequently, NIFTY touched a low of 7,511 in March 2020.

  • Then, in 2022, due to the Russia-Ukraine conflict, growing inflation, and the pressure on global markets, NIFTY witnessed a low of 15,183 in June 2022.

  • Throughout 2023, there were concerns regarding the global economy slowing down, which were compounded due to the collapse of Silicon Valley Bank in the US. Hence, even the Indian markets were under pressure. As a result, NIFTY touched a low of 16,828 in March 2023.

What Are the Factors That Cause Changes in Nifty?

The main factors that cause changes in the level of NIFTY are as follows:

  • Expectations regarding the fundamentals of companies: The value of NIFTY goes up and down based on the expectations regarding the performance of the companies whose stocks comprise this index. If people expect these companies to perform well, NIFTY moves up. However, if people expect these companies to not perform well, NIFTY moves down.

  • Emotions of participants: The fundamentals of companies do not change in a short period of time. So, why does NIFTY move up or down every second the market is open for trade? The fact is stock markets worldwide (NIFTY included) move up or down based on the emotions of traders and investors. At times, an event far away from India creates a panic, resulting in people selling stocks. However, there are times when people are optimistic and hence NIFTY moves up.

  • General economic conditions: These conditions include the inflation rate, interest rate, gross domestic product (GDP) growth, government policies, fiscal deficit, etc. If these factors are favourable, NIFTY generally moves up. However, if these factors signal a slowing down of the economy, NIFTY declines.

Conclusion

If you have just opened a trading account or even if you are an experienced investor, you can benefit immensely by understanding how Nifty values go up or down. It will help you understand how emotions and fundamentals drive Nifty. Based on that, you will be able to buy and sell securities. But before you start to trade, we will advise you to learn about the companies that constitute Nifty, which sectors they belong to, and how they are affected by economic ups and downs, as that will provide you with a holistic perspective of the companies underlying Nifty.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

Frequently Asked Questions

What is Nifty and what does it represent?

Answer Field

NIFTY is a leading stock market index that represents the market capitalisation of the top 50 companies listed on the National Stock Exchange (NSE).

How is the Nifty index calculated?

Answer Field

Nifty is calculated based on the free float market capitalisation of the top 50 companies listed on the NSE. The cumulative value of the market-cap of these companies is compared with the cumulative value of their market-cap on November 3, 1995, the base period, to calculate Nifty.

What are the constituents of the Nifty index?

Answer Field

Top stocks comprising Nifty include Reliance Industries, HDFC Bank, Wipro, Tata Motors, TCS, Apollo Hospitals, Power Grid Corporation, HCL Technologies, Tata Steel, BPCL, ICICI Bank, etc.

How often is the Nifty index updated?

Answer Field

NIFTY’s constituents are updated twice a year, first in June and then in December.

How does the Nifty index reflect market performance?

Answer Field

If Nifty moves up, it means that the stock market is up and the general mood is positive which shows that more people are buying than selling. However, when Nifty moves down, it indicates that people are losing confidence to an extent. Hence, in such a situation, more people sell than buy.

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