What is Nifty and how is it calculated?

When the news says “the market closed higher today”, it usually means the Nifty. This article explains what it is, how its number is worked out and how it differs from the Sensex.

First, what is an index?

An index is a yardstick. It groups together a set of shares that share something in common, such as their size or their industry, and turns their prices into a single number. When the prices of the shares in the group move, the number moves with them.

That one number lets investors and fund managers see how the market is doing and compare the performance of their own portfolios against it.

What Nifty means

The name joins “National” and “fifty”. The Nifty 50 is the index of 50 of the largest and most actively traded companies on the National Stock Exchange (NSE). It spans many parts of the economy, from banking and technology to energy, consumer goods, pharmaceuticals, autos and construction.

It is one of India’s two main benchmark indices. The other is the Sensex of the Bombay Stock Exchange. NSE also publishes many related indices, such as Nifty Bank, Nifty IT, Nifty Next 50 and indices for mid-sized and smaller companies.

How the value is worked out

The Nifty uses the free-float market capitalisation method. Take each company’s share price and multiply it by the number of shares the public can trade. Add these values up for all 50 companies. Divide the total by the same total on the base date, and multiply by 1,000.

Because bigger companies carry more weight, a move in one of the largest shares shifts the index more than a move in a small one. The calculation updates through the trading day and adjusts for events such as stock splits and rights issues, so the number keeps its meaning over time.

Who gets in

The NSE publishes the rules for entry and reviews the list every six months. Companies are told in advance of a change. Mergers, spin-offs or delisting can also trigger a change in between. The main tests, in plain words, are:

• Listed and IndianThe company must be listed on the NSE and incorporated in India.
• Easy to tradeIts shares must be liquid. NSE measures this with impact cost, which is how much the price moves when a large order goes through.
• Traded regularlyThe shares must trade on almost every day over the past six months.
• Enough shares in public handsSize is measured on the free-float, which is the part of the company that the public can actually buy and sell.

The detailed thresholds are set by NSE and are revised from time to time, so check the current methodology on the NSE website if you need the exact figures.

Nifty 50 and Sensex

Both measure the large end of the Indian market and usually move in the same direction. The differences are in who runs them and how many companies they hold.

Why a chart reader cares

The Nifty is a chart in its own right. The same tools that help you read a single share can be applied to the index to see the broad backdrop: whether the market as a whole is trending, pausing or turning. An index is a useful first look before you study individual shares. At Mars Equity, members study it with the ECLIPSE observation tools, which come with every membership.

You cannot buy an index directly. Products linked to it exist, and each has its own costs and risks. Learn how they work before using them.

Good to know The equity market in India trades from 9:15 AM to 3:30 PM, Monday to Friday.

This article is for education. It is not investment, financial or personal advice, a recommendation or an offer to buy or sell any security. Markets carry risk, including loss of capital. Index rules and constituents change over time, so refer to NSE and BSE for current details.