What is Nifty and How It is Calculated?

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The word ‘Nifty’ is derived from the words ‘National Stock Exchange’ and ‘Fifty’. Nifty is a stock market index of the National Stock Exchange (NSE). It consists of the top 50 companies which are traded on the NSE depending on the value of free-float market capitalisation. Nifty is known as CNX Nifty and Nifty 50.

Nifty is managed by the NSE Indices Limited and was launched in 1996. It can be used to check on the stock market. For example, if the stock market was up today then Nifty was also up today.

Nifty consists of the stocks of big companies with a global reach. Some of the companies listed on Nifty are HDFC Bank, Asian Paints, TCS, Maruti Suzuki India and more. Nifty also has various sub-indices like the Nifty Bank Index, Nifty Next 50, Nifty FMCG Index and more.

How is Nifty calculated?

You can obtain a company’s market capitalisation by calculating Nifty. To get the market capitalisation you have to multiply the share price of the company by the equity.

To get the free-float market capitalisation you can multiply the equity capital by the share price. To get the share proportions traded by the investors the result you get can be multiplied by the Investable Weight Factor (IWF).

The base value of 1000 is used to calculate the Nifty. To get the index value of Nifty the current market value can be divided by the base market capital and multiplied by the base value of 1000.

The formulas can be written as:

Equity capital x Share Price = Market Capitalisation

Share Price x Equity Capital * IWF = Free-float Market Capitalisation

Current Value / (Base Market Capital x 1000) = Nifty Index Value

Investing in Nifty

The Index Mutual Funds that track and replicate the Nifty portfolios can be used to invest in Nifty. As the Nifty rises and falls so do they. However, you will have to check on the tracking error. It is the deviation in these funds from the benchmark index - Nifty.

You can also trade in Nifty using Derivative Contracts such as Options and Futures. In this, the underlying asset is the index where the price fluctuations can be linked to the Nifty index.

The performance of Nifty can be impacted by global recession. The value of the Nifty index can be negatively impacted by the rising inflation.

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