Everything you should know about Nifty 50

NIFTY 50 is a term you'll see a lot if you're interested in the stock market in India. It's an essential concept for novice investors and those new to finance, so below, we'll explain what it is and how to start investing in NIFTY 50 stocks.

What is Nifty 50?

The NIFTY 50 is an index of the top 50 companies by market capitalization, which are listed on the National Stock Exchange (NSE). The National Stock Exchange of India (NSE) introduced the NIFTY fifty index on April 22, 1996. The index comprises the top 50 liquid large-cap stocks from 13 sectors of the economy which are traded on the NSE.

It is a popular indicator used by investors to measure the stock market's performance. The other major index is the Sensex, comprising 30 stocks, managed by the Bombay Stock Exchange (BSE).

 Although the NSE has more than 1,300 stocks, "the market was up today" usually implies that the NIFTY 50 index rose in value. This shows that the average performance of the 50 stocks was positive. Foreign investors often view the NIFTY movement as their main reference point when studying the Indian markets, and in many cases, their initial investments in India are in NIFTY stocks.

Eligibility criteria for Nifty Listing

The NIFTY 50 is a good indication of the top-performing stocks, with many of them being the cream of the crop regarding balance sheets, growth numbers, and global reach. Companies like Infosys, Reliance Industries, HDFC Bank, ITC, and Asian Paints, are all part of the elite list of NIFTY 50 stocks, having met the criteria of liquidity, F&O availability, and the six-month listing requirement. The list is revised every six months to ensure the index remains dynamic and responsive to the changing market. This is done so that financial products and baskets built around NIFTY stocks can have time to adjust their portfolios accordingly.

The stocks ousted from the NIFTY have experienced a sharp drop in prices, while the stocks added to the NIFTY have seen an upward surge. This demonstrates that the NIFTY is an ever-evolving and dynamic index.

 For example, NIFTY has seen significant changes in the past ten years. Out of the 50 stocks that were part of the index in 2010, only 30 remain today. This equates to 40% of the index being replaced in a decade.

When a stock is added to the NIFTY, it is considered a significant boost as it signals to investors that the stock is of high quality. The NIFTY is a well-constructed index, and the stocks included must meet stringent criteria.

The inclusion of a company in NIFTY50

In order to be considered for inclusion in the Nifty 50, a company must have its headquarters located in India and its stocks must be traded on the National Stock Exchange (NSE). Additionally, only securities that are part of the Nifty 100 index under the NSE's Futures and Options segment are eligible. The company's shares must also be highly liquid, as determined by their average impact cost, which is the expense associated with a security transaction relative to its index weight. For a stock to be included in the Nifty 50, it must have an average impact cost of 0.50% or less for 90% of the past six months of observation. Nifty 50 companies by free-float market capitalization: This ensures that the weight of a company in the index is in proportion to its market value. The free-float calculation method is more accurate in measuring the actual market value of a company.

Companies that make it to the Nifty 50 list are usually sizeable blue-chip companies with good earning visibility. They have solid fundamentals and enjoy a leadership position in their sector. These stocks can be considered safe bets for long-term investment. 

Besides, a company that wishes to be included in the Nifty 50 needs to have an average free-float market capitalization of 1.5x that of Nifty '50s most minor constituent to meet the float-adjusted market cap requirements for three months and have a 100% trading frequency in the last six months. Equity shares with DVR must also meet the liquidity and market cap criteria and have a free float of the company's DVR of 10% of its free-float market cap.

Top companies listed under Nifty 

Some of the top companies listed on the Nifty 50 have been consistently performing well. Investors should look to invest in these companies as they have the potential to generate good returns over the long term.

 How is Nifty calculated?

The Nifty 50 index is calculated using a free-float methodology, meaning that only shares readily available for trading in the market are used in the calculation. This makes the index more representative of the actual market conditions.

For example, if a company has 100 shares outstanding and its current share price is Rs 20, then the market capitalization of this company will be Rs 2000.

 Now the Nifty 50 index value will be calculated as follows:

•       Index value = 2000/(Base Market Cap x 1000)

 •       Base Market cap = 2000/1000 = 2

 •       Therefore, Nifty 50 Index value = 2000/(2 x 1000) = 1.00

Now let's find out the market cap and free-float market capitalization:

Suppose Company A has 200 million outstanding shares with a current price of Rs 10.

•   Market cap = 200 million x 10 = 2 billion

•   Free-float market capitalization = 2 billion x IWF (Index Weight Factor) = 2 billion x 0.45 = 900 million

•   Nifty 50 = 900 million / (2 billion x 1000) = 0.45

Therefore, the index value of Company A is 0.45.