Have you ever come across a news article about NIFTY 50? It’s a common sight, with NIFTY 50 charts being flashed in newspapers and on television almost daily. Investment professionals rely on the term NIFTY 50 as they predict market trends. In this blog, we’ll delve into the significance of NIFTY 50 and guide you on investing wisely for long-term wealth creation, equipping you with the knowledge to make informed investment decisions.
Understanding Nifty 50
The Nifty is a global stock index that ranks the 50 largest Indian companies in terms of their publicly traded market value. It comprises fifty of the country’s biggest and best-known companies. As of 30 September 2022, the index represented 62 % of the NSE’s total free float market value. The Nifty 50 is not just India’s leading indicator of the stock market, but also the Bombay Stock Exchange’s Sensex index of 30 companies, making it a stable and reliable investment option that can potentially lead to long-term wealth creation.
Similar changes in Indian markets are reflected in the change in this index. For example, if the overall market improves, the Nifty 50 will rise. High revenue growth, strong financials, an edge in competition, and market presence are typical characteristics of companies at Nifty 50. Some leading companies in this index are Reliance Industries, Infosys, ICICI Bank, HDFC Bank, ITC, TCS, Bajaj Finance, etc.
How is Nifty 50 Calculated?
The free float market capitalisation method calculates the value of NIFTY 50. The current market cap of all the stocks that make up NIFTY 50 is divided by its base period value to arrive at a value for this index.
All 50 companies’ weighted market cap is the current market cap. The value is calculated by multiplying the free float shares with the market price of the share. The total number of outstanding shares, excluding those held by promoters, governments, trusts and so on, is represented by free-float shares. On 3 November 1995, with a base value of 1000 and the corresponding market capitalisation of INR 2.06 trillion, the reference date for NIFTY 50 is established.
The formula for calculating NIFTY 50 is mentioned below:
Index Value = (Current Market Cap / Base Market Capital) x 1000
Here, The weighted market cap calculated for the index is the current market cap. The base market capital of all 50 index companies in the baseline period will be their total market cap. The value of the NIFTY 50 index as of the base date is 1000.
How to Invest in Nifty 50?
The NIFTY 50 is a collection of the best companies in India, as we’ve already mentioned. By investing in NIFTY 50, you become a part-owner of these fantastic companies. There are two ways to invest in NIFTY 50. First, you can buy stocks directly, with the same percentage as your weight in NIFTY 50. Alternatively, you can choose to invest in index mutual funds that track NIFTY 50, which is a more convenient option for many investors.
The second option is to invest in index mutual funds to track NIFTY 50. These funds have a portfolio that mirrors the NIFTY 50, just like the index. Therefore, the NIFTY 50 index fund will have the same percentage of stocks as the NIFTY 50; all you need to do is put a certain amount into it. This simple and straightforward investment method can empower you to make wise investment choices.
Stock Selection for Nifty 50
Specific rules are set on which 50 stocks should be included in the NIFTY 50 index. The NIFTY 50 concept is based on some of the following regulations and criteria:
1. Universe
One of the main criteria for membership in NIFTY50 is a company’s listing on the national stock exchange. In addition, a company’s stock should be available for trading in the NSE’s futures and options segment. A company cannot be part of NIFTY 50 if it is not listed or traded on the National Stock Exchange.
2. Basic Construct
The top 50 large-cap firms from the NSE universe are chosen according to their free-float market capitalisation. They are calculated by multiplying the company’s share price by the number of available shares on the open market.
3. Liquidity
Liquidity is another essential factor to consider in addition to the NIFTY 50. It means that stocks in the NIFTY 50 index must be easy to buy and sell and have high trading volumes.
4. Rebalancing and reconstitution
The 50 companies in the NIFTY 50 index are not fixed. Every year, between June and December, the index is rebalanced quarterly. The NIFTY 50 index rebalances by excluding stocks that would have seen a decline in market value, suspension, or delisting. Emerging stocks that would increase the market cap are then added to replace those lost. This transparent and systematic process ensures that you are always aware of the investment landscape.
Conclusion
Now, you know what the Nifty50 index is. Since it provides a clear overview of the overall market, it is one of India’s stock exchanges’ most widely used indices. This makes it a handy tool for investors, traders, pension funds, and policymakers. For a safe and secure stock investment, you can choose the best stock market app, like BlinkX.
