Introduction

Nifty 50 is one of India's most popular and widely used stock market indices. It represents the performance of 50 large-cap companies listed on the National Stock Exchange (NSE). These companies belong to different sectors and industries, such as banking, IT, pharma, auto, FMCG, etc. Nifty 50 is also known as Nifty or NSE Nifty.

Nifty 50 is crucial because it serves as a benchmark for the Indian stock market. It reflects the overall market sentiment and the economic health of the country. It also helps investors and traders to compare their returns with the market returns and to diversify their portfolios.

How is Nifty 50 calculated?

Nifty 50 computation employs the free-float market capitalization method. This method considers only the shares available for public trading and excludes the shares held by promoters, government, employees, and other strategic partners. This way, it reflects the actual market value of the companies in the index.

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To understand how Nifty 50 is calculated, we need to know some terms and concepts involved in the calculation, such as:

• Market capitalisation is the total value of all the company shares held by investors in the market. It is computed by multiplying the number of shares outstanding by the current share price.
• Free-float market capitalisation is the market value of the shares available for public trading. You can compute it by multiplying the market capitalisation by the investable weight factor.
• The investable Weight Factor (IWF) determines the percentage of shares available for trading for each company in the index. It ranges from zero to one, where zero means no shares are available, and one means all shares are available. The IWF is decided by the index committee based on various criteria, such as shareholding pattern, trading volume, liquidity, etc.
• The base period is the reference point for calculating the index value. It is taken as November 3, 1995, for Nifty 50.
• Base market capital is the aggregate market value of all the 50 companies in the index during the base period. It is Rs. 2.06 trillion for Nifty 50.
• The base index value is the value of the index during the base period. It is 1000 for Nifty 50.

Now, let us see the formula and the steps involved in the calculation of Nifty 50:

• Step 1: Determine the market capitalisation of each company in the index by multiplying the total outstanding shares with the current price per share.
• Step 2: Calculate the free-float market capitalisation of each company by multiplying the market capitalisation by the investable weight factor.
• Step 3: Calculate the current market value of the index by adding up the free-float market capitalisation of all the 50 companies.
• Step 4: Compute the index value by dividing the present market value by the base market capitalisation and multiplying the result by the base index value.

Formula: Index Value = (Current Market Value x Base Index Value) ➗ (Base Market Capital)

Why is the free-float market capitalisation method used?

The free-float market capitalisation method has several benefits over other methods, such as:

• It reflects the actual market value of the companies in the index, as it excludes the shares that are not available for trading.
• It adjusts the weight of each company in the index according to its investable weight factor, which represents the liquidity and tradability of its shares.
• It is easy to calculate and update, as it only requires each company's current share price and the investable weight factor.
• It is widely used and accepted as a worldwide standard method for calculating stock market indices.

Conclusion

Nifty 50 is a stock market index representing the performance of 50 large-cap companies listed on the NSE of India. It is calculated using the free-float market capitalisation method, which considers only the shares available for public trading. This method reflects the actual market value of the companies in the index and adjusts their weight according to their liquidity and tradability. It also helps investors and traders to compare their returns with the market returns and to diversify their portfolios.

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