Nifty 50 Weighting Method: Indices play a very important role in the stock market. These indices evaluate the overall performance of the sector they represent and also entire the entire state of the economy. While sectoral-based indices are constituted based on the companies in the specific sector, you must wonder how are stocks selected and weighted in the index that represents the economy.
In this article, we will be discussing the Nifty 50 weighting method and the criteria for stocks to be included in the Nifty 50 index.
What is Nifty 50?
The Nifty 50 is the benchmark index of the National Stock Exchange. The word nifty is the combination of the word national and fifty. The index constitutes the top 50 stocks that are highly traded among all industries. This index is one of the two important indexes that is used as a barometer by investors to see how the economy is doing.
This index is used for different purposes like benchmarking fund portfolios, launching ETFs, index funds, and structured products
Eligibility criteria for inclusion of stocks in Nifty 50
Before covering the Nifty 50 weighting method, let us look at the criteria the stocks have to fulfill in order to be included in the Nifty 50 index
- The best measure to check the liquidity of the stock is to check its market impact cost. It will reflect the costs faced while trading an index. In order for the stock to be qualified for possible inclusion in the nifty 50, it should have n average impact cost of 0.50% or less when it is traded during the last six months for at least 90% of the time, for a basket size of Rs 10 crores
- In order to be eligible for inclusion, the company should have a history of listing for a minimum of six months
- The company must be allowed to be traded in the future and options segment in order to be eligible to be a constituent of the index
- A company that comes out with an IPO will be eligible to be included in the Nifty 50 index provided it fulfills the normal eligibility criteria for the index for 3 months instead of 6 six months.
When do the stocks in Nifty 50 get rebalanced?
The rebalancing of the index is done on a semi-annual basis. The cut-off date to evaluate if any changes in the index are needed is January 31 and July 31 of each year. If there are any changes to be made in the index, a 4-week prior notice will be given to the market.
There can be additional rebalancing in case any company in the index goes through a scheme of arrangement for corporate events such as a merger, spin-off, forced delisting or suspension, etc
Nifty 50 Weighting Method
The weighting method that is used to calculate the Nifty 50 Index is based on the free-float market capitalization-weighted method. In this method, the total market value of all 50 stocks is reflected relative to the base period. The base period considered for the Nifty 50 is November 3, 1995.
Steps involved in the Nifty 50 Weighting Method
Step one: It involves the calculation of the market capitalization of all the companies. This will reflect the total value of all the shares that are owned by the investors in the market.
Market capitalization = (Shares Outstanding) x (Current Price)
Step two: This step involves multiplying the market capitalization with the Investable weight factor (IWF). The investible weight factor considers only those shares that are available for public trading
Free-float Market Capitalization = (Market capitalization) x (Investable Weight Factor(IWF))
Step three: This step involves multiplying the weights assigned to the individual stocks by their free-float market capitalization. The calculation for each stock would look as follows
Weighted Free Float Market Cap = (Market Cap) x (IWF) x (Weight)
Step four: The final step involves dividing the current market value by its base value in order to arrive at the value of the index.
The base value will be derived from 1995 which stands at Rs. 2.06 trillion. The sum total of the weighted free-float market capitalization of all the stocks will be considered at the current market value.
Index Value = (Current Market Value/Base Market Capital) * 1000
Governance of the Index:
All the indices in the NSE are managed by a professional team. The governance structure is made up of the NSE Indices Limited Board of Directors, the Index Advisory Committee (Equity), and the Index Maintenance Sub-Committee.
In this article, we discussed what is nifty 50, the eligibility criteria for the inclusion of stocks in Nifty 50, the rebalancing of nifty 50, the governance of nifty 50, and the Nifty 50 Weighting Method.
The stock market indices are a very important pillar that represents the overall health of the market. A properly rebalanced index will include stocks in such a way that, it will precisely represent the situation in the market that help the individual take proper decisions in the market.
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