What is NIFTY 50, and how does it work?
What does NIFTY 50 measure, and who runs it?
An index is one number that sums up a group of shares. NIFTY 50 sums up 50 large companies traded on NSE. NSE Indices Limited owns and manages it. It is one of the NSE group companies. The index started at 1,000 on its base date, 3 November 1995.
How are the NIFTY 50 companies chosen?
A company must first be in the NIFTY 100 index and have futures and options on NSE. Its shares must have traded every day for 6 months. They must also have , meaning they are easy to buy and sell in large amounts. The test is , the extra cost of a large order. Free float means shares the public can trade, not those held by promoters, the company's controlling owners. A newcomer's free-float market value must be at least 1.5 times the smallest member's. The list is reviewed every 6 months. Changes start on the of March and September, after 4 weeks' notice. Events such as a merger can bring an extra change.
Why do traders watch NIFTY 50?
It updates through the trading day, so it quickly shows how large Indian companies are moving. Funds use it as a benchmark, a yardstick for their own returns. Index funds copy it. Traders use NIFTY futures and options, which are contracts based on the index.
How is NIFTY 50 calculated?
Each company counts by its free-float market value, which is share price times the shares the public can trade. The index level compares the total value with the base date. Company A is 10% of an index and Company B is 1%. Both rise 2%. A adds about 0.2% to the index. B adds about 0.02%.
What this does not establish
A rising NIFTY 50 does not mean every company in it rose, or that it will keep rising.
In short
- NIFTY 50 is one number built from 50 large companies on NSE.
- Companies with more free-float market value move it more, and the list is reviewed every 6 months.
Two companies in an index both rise 2%. Why can one move the index more?
- It has a higher share price
- It has a bigger weight in the index
- It joined the index earlier
Show the answer
B. It has a bigger weight in the index
Weight comes from free-float market value, not from the share price alone. A bigger weight has a bigger effect.