The NIFTY 50 is a stock market index that represents the shares of the leading 50 companies traded on India's National Stock Exchange (NSE). The NIFTY 50 includes stocks from various sectors and is considered a significant indicator of the performance of the Indian economy.
What Does the NIFTY 50 Include?
India's financial markets, especially the stock market, are rapidly developing. The NSE is one of the largest stock exchanges in Asia. As of March 31, 2024, there are a total of 2,255 actively traded stocks on the NSE, with a total market value of approximately $4.57 trillion.
The NIFTY 50 index was created by the NSE in 1996. As a benchmark index, it is referred to as the flagship of the NSE. As of September 29, 2023, the NIFTY 50 index represents about 59% of the total public value of stocks listed on the NSE.
The index includes stocks from 50 different companies, which together operate in 12 different sectors. The sector with the highest share in the index is the financial services sector at 34.29%. It is followed by energy at 12.69%, information technology at 12.32%, fast-moving consumer goods at 8.04%, automotive at 7.79%, construction at 4.27%, healthcare at 4.24%, and metals and mining at 3.96%.
The remaining sectors include consumer durables, telecommunications, power, construction materials, and other services.
Therefore, the NIFTY 50 index is well-diversified, and the sectors it includes are the most important sectors of the economy. Additionally, all the stocks included in the NIFTY 50 index are leading companies in their sectors.
For this reason, the index provides a comprehensive view of the general performance of the Indian market. If the NIFTY 50 index is performing well, it is assumed that the Indian market is also in good condition. Conversely, if the NIFTY 50 is in decline, it is interpreted that the Indian market is not in good condition.
How is the NIFTY 50 Calculated?
Since June 26, 2009, the NIFTY 50 has been calculated using the Free Float Market Capitalization weighted method. This method differs from the Total Market Capitalization weighted method.
The Total Market Capitalization method includes all shares of a company, both public and non-public. In contrast, the Free Float Market Capitalization method considers only shares that are traded in the market. Shares held by the company itself, the government, other private companies, or individuals are excluded. Thus, this method ensures that the index reflects more realistic market values.
The weights of companies in the index are determined proportionally by the free float market value (the number of public shares multiplied by the price of the shares). Therefore, companies with a higher weight in the index have a greater impact on the index's performance.
The use of this method positively distinguishes the NIFTY 50 index from others. The NIFTY 50 index more accurately displays the real liquidity and public equity in the Indian market.
Conclusion
The NIFTY 50 index is widely followed by both local and global traders to observe the overall condition and direction of the Indian market. Additionally, the index facilitates direct trading in a well-diversified portfolio consisting of the biggest companies in the Indian economy rather than trading individual stocks.