What is Nifty | How is it Calculated | Share Market Basics

What is Nifty | How is it Calculated | Basics of Share Market. In the previous article, we have given What is Sensex? How is it calculated?. Today we are discussing Nifty meaning, How is Nifty calculated. The NIFTY 50 or simply NIFTY as it is popularly known is India’s most tracked Index from the house of India’s leading stock exchange the NSE – National Stock Exchange. The value of the NIFTY is a single numerical representation for 50 of its Index constituents. The NIFTY 50 index number is India’s benchmark index and is a reference to the current state of the markets. It measures and tracks the stock movement of 50 index constituents known as the Nifty Index stocks. These NIFTY 50 are highly liquid and come from different sectors of the Indian economy and collectively form the NIFTY. Simply said, the NIFTY 50 is synonymous with the NSE itself.

How is Stock Market Index Calculated?

Step 1: For analyzing the performance of a market index like Sensex or Nifty, a basic understanding of how the index is calculated is useful.

Step 2: Let’s consider that a market index needs to be designed based on the market cap of 40 companies. An index committee studies and analyzes different companies and then compiles a list of 40 companies based on their respective “free-float market cap”.

Step 3: Free float market cap is deduced from stocks that are available for trading in the stock market and not held by Government or company personnel.

Step 4: After that, the market cap of these 40 companies is added and made relative to the base year that is used for the construction of the market index. Generally, the value of the base year is set at 100 for the ease of calculating percentage changes of the index.

Price Index Calculations Formula

NIFTYis calculated by using the market capitalization weighted method according to which weights are assigned according to the size of the company. Larger the size, larger the weightage.

The CNX Nifty is computed using the free-float market capitalization weighted method wherein the level of the Index reflects the total market value of all the stocks in the Index relative to the base period November 3, 1995. The total market cap of a company or the market capitalization is the product of market price and the total number of outstanding shares of the company.

• Market Capitalization = Equity Capital * Price
• Free Float Market Capitalization = Equity Capital * Price * IWF
• Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)

The base market capital of the Index is the aggregate market capitalization of each script in the Index during the base period. The market cap during the base period is equated to an Index value of 1000 known as the base Index value.

Four main factors are to be taken into account when calculating the NIFTY. They are

• The base year is taken as 1995
• The base value is set to 1000
• NIFTY is based on 50 actively traded stocks of the NSE.
• 50 top stocks from selected from 24 sectors

How can a common investor mirror NIFTY Returns?

According to the world’s most decorated investors Warren Buffett, one of the best ways for an average retail investor to consistently generate returns in the stock markets is buying the indices regularly and using the principle of rupee cost averaging while buying the same. This investment approach is also known as a passive investment approach. This approach over any other random or active investment approach can compound wealth for an average investor over long periods of time.

But how can one buy the NIFTY to get close to the NIFTY returns? The easiest way is buying a NIFTY 50 ETF i.e. a NIFTY Exchange Traded Fund which is linked to the NIFTY. Alternatively, you can also buy SENSEX ETF’swhich are linked to the Sensex.

A few of the NIFTY ETF’s which an investor can buy on the SAMCO Trading platform are as under.It is not a suggestion to buy.We are providing this for Reference only.

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