Even those who are not closely associated with the financial world are hardly immune to the far-reaching impact of the happenings in the global market on our daily lives. From inflation to the nuances of the stock market, the global economic market’s finer aspects are out there for all of us to examine. In this context, some words and phrases often leap to the eye. A case in point is – the stock market and market indices. In current times, it is almost impossible to escape the noise around the stock market. In India, this means having visuals and data about the stock exchange indices like Sensex and NIFTY 50 being delivered to you daily.
Whether or not you actively invest in the stock market, this information is relevant to you, as the movement of the stock market indices has micro-level and macro-level impacts on how you earn, spend, and your overall monetary health. Keeping an eye on the country’s two major stock market indices – Sensex and NIFTY – can go a long way in improving your relationship with money.
In particular, the NIFTY 50 is one of India’s leading stock market indices and is of great significance. It represents the performance of 50 of the largest and most liquid companies listed on the National Stock Exchange of India (NSE).
What is an index?
Before we delve into the nuances of what NIFTY 50 is, let us understand what a stock market index is. Stock market indices are essential tools for investors and traders to understand the performance of a particular stock market or a group of stocks.
These indices play an incomparable role in the stock market as they give investors an overall picture of market performance. By tracking the performance of a select group of stocks, stock indices give investors a benchmark to measure their portfolio’s performance against. This helps investors make informed investment decisions by comparing their portfolio’s performance against the market and assessing their risk exposure.
In addition to this, stock indices also provide a way for investors to gauge the overall direction of the market. A rising stock index indicates that the market is performing well, while a declining index suggests that the market is not performing well.
The most well-known stock indices globally include the Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ Composite. As mentioned above, the most prominent indices in India are the Sensex and NIFTY. These indices track the performance of a select group of stocks, usually blue-chip companies, to provide an overall picture of the market’s performance.
Different indices are calculated using various methods depending on the stock market being measured and the index itself. The most common method used is the market capitalisation-weighted method, where the weight of each stock in the index is proportional to its market capitalisation. This means that larger companies significantly impact the index’s performance more than smaller ones.
What is NIFTY 50?
The National Stock Exchange Fifty (NIFTY 50), as mentioned above, tracks the performance of 50 blue-chip companies across various sectors, including finance, technology, consumer goods, and pharmaceuticals.
So, what are blue-chip companies? Blue-chip companies refer to large, well-established, and financially sound companies. These organisations come with a history of steady growth and high returns. They also boast of a longstanding reputation for quality and reliability. Blue-chip companies operate across a range of industries. By virtue of their strong market presence and brand value, they also have a large customer base. They are considered low-risk investments since they are not likely to be affected by economic downturns.
By providing a list of 50 blue-chip companies, it works as an index portfolio of sorts that gauges the movement of the Indian stock market. The index derives its name from the fact that 50 companies are listed on the index.
Glance at NIFTY 50 history
NIFTY 50, with an inception date of November 3, 1995, is owned and managed by NSE Indices Limited. It accounts for a diversified 50-stock index spanning 13 sectors. At its inception, NIFTY 50 constituents reflected 33.7% of full market capitalisation. As of September 30, 2022, this representation has grown to 62% of the total free-float market capitalisation of all stocks listed on the National Stock Exchange (NSE).
Features of NIFTY 50
Companies that appear on NIFTY 50 have various features that make them eligible to enter the coveted list. For instance, in order to be eligible for the NIFTY 50, a company must be listed on the National Stock Exchange (NSE). The company’s stocks must be available for trading under NSE’s Futures & Options segment.
NIFTY 50 is calculated based on the free float market capitalisation weighted method. Here, the weight assigned to a stock is based on its free-float market capitalisation value. Additionally, this same value calculates a buffer to minimise turnover. The free-float market capitalisation is calculated by multiplying the stock price by the number of available shares.
Free-float market capitalisation = Price x Outstanding shares
(Where outstanding shares = number of shares issued – locked-in shares)
Stocks that are included in the NIFTY 50 must have a high trading volume. They must be easy to buy and sell, thereby ensuring the liquidity of the index.
To ensure the functionality of the NIFTY 50 index, it is rebalanced semi-annually. The rebalancing in June and December aims to remove stocks that have declined in market capitalisation, have been suspended, or have been delisted.
The stocks that have been removed thus are replaced by others that may have increased market capitalisation. This, in turn, increases the exposure of the NIFTY 50 to emerging companies and sectors.
Using NIFTY 50
There are various ways in which the NIFTY 50 index can be used by investors. By functioning as a snapshot of the Indian market daily, it allows investors to analyse stocks across various sectors and make informed decisions.
It is important to remember all stocks on the index have different weightages. But the curated index does most of the work for you by arranging the stocks based on their weightage. With NIFTY 50, the top slot is occupied by the most weighted stock. The next-most weighted stock follows this in the second spot, and so on. So, investors have a complete and organised view of the stock value in real-time, making the index an excellent crutch for critical financial decisions.
That’s not all. Several users also use the NIFTY 50 index to invest in index mutual funds that track the index’s stocks. Investing in funds whose weightage mimics the index’s trends and characteristics prevents rude shocks. In other words, the index mutual fund will contain the same NIFTY 50 stocks in identical proportions, allowing you to earn significant returns.
NIFTY 50 also allows investors to trade in NIFTY futures and options contracts. However, as an investor, you should do well to remember that fees, expiry dates, and other relevant data differ with every contract.
Nifty 50 constituents (as of February, 2023)
|Adani Enterprises||Tata Consumer Products|
|Dr. Reddy’s Laboratories||Tech Mahindra|
|Kotak Bank||Bharti Airtel|
|IndusInd Bank||Axis Bank|
|Oil & Natural Gas Corporation||Nestle India|
|Bajaj Auto||Apollo Hospital|
|Bajaj Finserv||Mahindra & Mahindra|
|Larsen & Toubro||Britannia|
|HDFC Life||UltraTech Cement|
|Tata Consultancy Services||NTPC|
|Asian Paints||Divis Lab|
|State Bank of India||Wipro|
|Coal India||HCL Technologies|
|POWERGRID Infrastructure||Tata Motors|
|HDFC Bank||Hindustan Unilever|
|Cipla||Maruti Suzuki India|
|HDFC||Maruti Suzuki India|
|ICICI Bank||Hero MotoCorp|
|Reliance Industries||Hindalco Industries|
|Grasim Industries||Tata Steel|
Benefits of NIFTY 50
There are several benefits that the NIFTY 50 index extends to users. Some of them are:
Stock market at a glance: The NIFTY 50 index is a comprehensive representation of the Indian stock market. It provides a snapshot of the performance of the top 50 large-cap companies in the country, simplifying investment decisions for all stakeholders in the ecosystem.
It serves as a benchmark for investors to compare the performance of their investments with the overall market.
Promising returns: The objective of NIFTY 50 is to track 50 companies with the largest free-float market capitalisation value. These companies are likely to be organisations with a longstanding historical performance of good returns. By using NIFTY 50 as a map of sorts, investors can significantly benefit from stocks that can potentially yield maximum returns.
Less volatile: The NIFTY 50 index has a low turnover rate, meaning that changes in its composition are infrequent. This lack of volatility makes the NIFTY 50 index a great benchmark for investors with varying experience levels.
Diversification: The NIFTY 50 index comprises a basket of 50 stocks from different sectors, reducing the risk for investors. This diversification allows investors to spread their risk across different sectors, reducing the impact of any negative performance in a single sector on their portfolio. With NIFTY 50, no matter your return expectation or risk tolerance, you will likely find an investment option that suits your needs. It is a great tool for long-term investments, allowing users to reap benefits from tried and tested stocks.
Investment products: The NIFTY 50 index forms the basis for several investment products, such as index funds, exchange-traded funds (ETFs), and derivatives, that provide investors with a range of investment options and benefits. In essence, these investment products save users the hassle of investing in each of the 50 stocks individually but still reaping the benefits.
Transparent: The details of the NIFTY 50 index and how its constituents are decided upon are publicly available. As a result, there is hardly any ambiguity around how the index is constructed and maintained. This transparency allows investors to make informed financial decisions based on accurate and up-to-date information.
There is also no inherent bias involved in NIFTY 50 as the investor or fund manager follows an automated system of sorts to decide the stock to be purchased and its proportion.
The NIFTY is also particularly easy to track, making it perfect for investors to follow.
How is NIFTY 50 settled?
The NSE provides real-time index values and a daily official closing value for the NIFTY 50, which is used to settle derivatives contracts based on the index. The NIFTY 50 is settled on a rolling basis. This means that the settlement of each transaction takes place on the next trading day (T+11).
Investing in the NIFTY 50 index is an easy and reliable way to sustain and grow wealth. With NIFTY 50, you are presented with the names and details of 50 companies that are the top performers in their respective sectors. They work well as a guide for long-term investment, providing a snapshot of companies that have consistently performed well and have managed to weather market storms.