The NIFTY 50 is the flagship index on the National Stock Exchange of India Ltd. (NSE). The Index tracks the behavior of a portfolio of blue-chip companies, the largest and most liquid Indian securities. It includes 50 of the all companies listed and/ or traded on the NSE, captures approximately 66% of its float-adjusted market capitalization and is a true reflection of the Indian stock market.
The NIFTY 50 covers major sectors of the Indian economy and offers investment managers exposure to the Indian market in one efficient portfolio. The Index has been trading since April 1996 and is well suited for benchmarking, index funds and index-based derivatives.
The NIFTY 50 is owned and managed by NSE Indices Limited (formerly known as India Index Services & Products Limited-IISL), India’s first specialized company focused on an index as a core product.
Highlights: The NIFTY 50 is a 50 stock, float-adjusted market-capitalization weighted index for India. It is used for a variety of purposes, such as benchmarking fund portfolios, index-based derivatives and index funds.
The NIFTY 50 is derived from economic research and is created for those interested in investing and trading in Indian equities.
Market Representation: The NIFTY 50 stocks represent about 66% of the total float-adjusted market capitalization of the National Stock Exchange (NSE).
Turnover Representation: The NIFTY 50 stocks represent about 54% of the total float-adjusted market capitalization of the National Stock Exchange (NSE).
Trading in derivative contracts based on NIFTY 50:
The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with index futures on June 12, 2000. The futures contracts on the NSE are based on the NIFTY 50. The exchange introduced trading on index options based on the NIFTY 50 on June 4, 2001. Additionally, exchange traded derivatives contracts linked to NIFTY 50 are traded at Singapore Exchange Ltd. (SGX).
Index Computation: The NIFTY 50 is computed using a float-adjusted, market capitalization weighted methodology*, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The methodology also takes into account constituent changes in the index and corporate actions such as stock splits, rights issuance, etc., without affecting the index value.
- Beginning June 26, 2009, the NIFTY 50 is being computed using float-adjusted market capitalization weighted method, wherein the level of index reflects the float-adjusted market capitalization of all stocks in the Index.
Index review and eligibility criteria
Index Review frequency:
The review of NIFTY 50 is undertaken semi-annually based on data for six months ending January and July. The replacement of stocks in NIFTY 50 (if any) is implemented from the last trading day of March and September. In case of any replacement in the index, a four weeks’ prior notice is given to the market participants.
Additional index reconstitution may be undertaken in case any of the index constituent undergoes merger, spin-off, delisting, specific cases of capital restructuring which may result into change in the stock prices etc., in case any of the index constituent is moved to BZ series, if trading permission of any of the index constituent is withdrawn from F&O segment, if a security is suspended for trading from Capital Market for any reason and in case of any adverse
regulatory findings or orders/ governance related issues, order issued against any of the index constituent that necessitates removal of such stock from the index in the larger interest of investors/ stakeholders as may be determined by the Index Maintenance Sub-Committee (Equity). In case of a merger, spin-off, capital restructuring or voluntary delisting, equity shareholders’ approval is considered as a trigger to initiate the replacement of such stock from
the index through additional index reconstitution. For all other cases, replacements will be initiated based on notifications issued by the Exchange.
Eligible Securities:
Constituents of NIFTY 100 index that are available for trading in NSE’s Futures & Options segment are eligible for inclusion in the NIFTY 50 index. The latest composition of NIFTY 100 including most recent changes whether announced or yet to be announced shall be considered eligible subject to availability of trading in NSE’s Futures & Options segment in such stocks.
Differential Voting Rights:
Equity securities with Differential Voting Rights (DVR) are eligible for inclusion in the index subject to fulfilment of specified DVR related criteria.
Trading Frequency:
The company’s trading frequency should be 100% in the last six months .
Liquidity:
For inclusion in the index, the security should have traded at an average impact cost of 0.50 % or less during the last six months for 90% of the observations for a portfolio of Rs. 10 crores.
Impact cost is the cost of executing a transaction in a security in proportion to its index weight, measured by market capitalization at any point in time. This is the percentage mark- up suffered while buying/selling the desired quantity of a security compared to its ideal price — (best buy + best sell)/2. Please refer section on ‘Impact Cost’ within this document.
Float-Adjusted Market Capitalization:
Companies will be eligible for inclusion in NIFTY 50 index provided the average free-float market capitalisation is at least 1.5 times the average free-float market capitalization of the smallest constituent in the index.
Buffer:
As part of the semi-annual reconstitution of the index, a maximum of 10% of the number of companies in the index (i.e. five companies) may be added in a calendar year.
Where the committee considers that the number of changes at the first semi annual rebalance might restrain the second semi annual rebalance, it retains the right to reduce the number of constituent changes at the first review in reverse order of the free-float capitalisation. (In other words, the largest eligible company will be added and the smallest company removed, and then the next largest added and next smallest removed, and so on until the committee deems that the appropriate number of changes have been made.
At the second semi-annual rebalance, the same principle applies, however once a total of five companies have been added to the index across the two semi-annual reviews, no further additions (or deletions) will be made.
However, the limit of maximum 10% change shall not be applicable for any exclusion of a company on account of scheme of arrangement as stated above, and for the company added to replace it.
Great post to read