What is Nifty, its constituents & how is it calculated

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To understand what is Nifty one first needs to be aware of what is a stock index? In simple words a stock index is group of some stocks from the list of stocks with similar characteristics. This grouping of stocks can be on the type of industry, total market capitalisation or the size of the company.

To calculate the value of the stock market index, one can use the values of the underlying group of stocks. Any change in the value of underlying stock also leads to a change in the stock index value. If the price of most of the stocks rises, the index will again rise and vice-versa.

Thus, an index is indicative of changes in the market. It reflects the overall market investing sentiment and price movements.

Now coming back to what is Nifty? NIFTY is a market index introduced by the National Stock Exchange. It is a blended word – National Stock Exchange and Fifty coined by NSE on 21st April 1996. NIFTY 50 is a benchmark based index and also the flagship of NSE, which showcases the top 50 equity stocks traded in the stock exchange out of a total of 1600 stocks.

These stocks span across 13 sectors of the Indian economy which include – information technology, financial services, oil & gas, consumer goods, automobile, metals, pharmaceuticals, construction, telecom, cement and cement products, pesticides and fertilizers, energy, and other services. It follows the patterns and trends of blue-chip companies. These are the largest companies with high liquidity in India.

Nifty Calculation

NIFTY 50 indices are computed based on a float-adjusted and market capitalisation weighted method. In this method, the level of index demonstrates the aggregate market value of stocks present in the index in a specific base period. Such a base period for a NIFTY 50 index is November 3,  1995 where the base value of the index is considered 1000 and its base capital stands at Rs. 2.06 lakh crore.

The formula for calculating price index is listed below –

Index value = Current MV or market value / (Base Market Capital * 1000)

The methodology involved in the calculation of indices also considers changes in corporate actions, which for instance comprise of rights issuance, stock splits, etc.

The NIFTY share market index is a benchmark standard against which all equity markets in India are measured. Therefore, NSE conducts regular index maintenance to ensure that it remains stable and persists as the benchmark in the Indian stock market context.