Full Form of NIFTY – National Stock Exchange Fifty
The full form of NIFTY is National Stock Exchange Fifty. The NIFTY is the prominent benchmark index of the NSE (National Stock Exchange) comprising of stocks of the 50 different companies from different diversified sectors of the economy where the valuation of the NIFTY is determined on the basis of the performance of these stocks, and it is owned as well as managed by the NSE indices limited.
How is NIFTY Calculated?
In order to calculate the NIFTY, the weighted free-float market capitalizationFree-float Market CapitalizationFree Float Market Capitalization is a method by which the market cap of an index’s underlying are calculated. It is calculated by multiplying the price with the number of outstanding shares available for investors and traders. method is used, i.e., free-float capitalization of the company is considered for index calculation and assigning of weights to the stocks in the index. The following are the steps that can be used for calculating NIFTY.
- For calculating the value of National Stock Exchange Fifty, firstly, market capitalization will be determined by multiplying the shares outstanding with the current prices of all of the companies in NIFTY.
- After that, free-float market capitalization will be calculated by multiplying the market capitalization of each company with its investible weight factor (IWF), where IWF refers to the unit of the floating stockFloating StockThe total amount of shares of a company that are available for trade in the market is known as floating stock. It's derived by deducting the value of closely held shares and restricted stock from the total outstanding shares. of the company when expressed in terms of the number of shares that are available for the purpose of trading.
- For the floating stock holding of promoters or group of promoters, strategic stakes by the corporate bodies, shares under the log-in category, cross-holdings, FDIs, Holdings of government as the strategic investor, and employee welfare trusts are excluded from the number of shares that are available for the purpose of trading. Then, the float market capitalization of all the stocks will be added together.
- After the calculation of free-float market capitalization, Base Market Capital and base index value will be taken where base market capital is the market capitalization of the base year, and the base index value is kept at 1000.
- Lastly, Index Value will be calculated using the formula:
Usage of NIFTY
The NIFTY can be used for various different purposes. The following are some of the usages of the national stock exchange fifty:
- Benchmarking fund portfolios
- Launching of the index fundsIndex FundsIndex Funds is a form of mutual fund constructed to replicate and match the performance of a particular country's index like S&P, NASDAQ, etc., and helps investors take broad market exposure due to the amount invested in various stocks of the different sectors of the economy.
- Index-based derivatives
Difference between NIFTY and SENSEX
The following are the main differences between NIFTY and NSE:
- NIFTY stands for the National Stock Exchange Fifty, whereas SENSEX stands for the Sensitivity Index.
- The Nifty is the benchmark index of the NSE, which consists of 50 companies being most actively traded in the National Stock Exchange whereas SENSEX is the benchmark index of the BSE and it is the stock market indexes that consist of the 30 well established and financially sound companies which are listed on the Bombay Stock Exchange.
The following are the benefits of the National Stock Exchange Fifty:
- It is one of the highest liquid stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. indexes in futures as well as in the options category, which means the trades can easily enter and take the exit from their positions.
- Its flexibility as this option can be easily used among the various ranges of strategies, such as from very conservative to the options having higher risks.
- It is not possible to manipulate it as large numbers of players are involved in both sides of trades. Moreover, The level of National Stock Exchange Fifty is determined on the basis of 50 stocks, so manipulation of such large combinations is generally not possible.
- The fall in the NIFTY generally does not exceed by 5% in a single day as NIFTY consists of 50 stocks, so the impact of a drop in a single stock price does not impact the NIFTY as a whole much whereas there is the probability that the stock can fall by 20-40% in a single day which can result in a huge loss to the investor.
- If the investor invests in an individual stock, then the investor has to check out that company’s financials closely, but in the case of NIFTY, there is no need to check any financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.. Only the sound knowledge of technical analysis is required to trade in NIFTY.
The following are the disadvantages of the National Stock Exchange Fifty:
- If the person is the risk-taker, then trading in it is not a good option because most of the times, nifty enters within a trading range as it includes both the gainers as well as looser stocks but individual stocks of the company continue to rise without any trading range, sometimes even during the situation when the market is in a bearishBearishBearish market refers to an opinion where the stock market is likely to go down or correct shortly. It is predicted in consideration of events that are happening or are bound to happen which would drag down the prices of the stocks in the market. state. So, trading in the NIFTY person might have to forgo good return, which it could have earned by trading in the individual stocks.
- Trading in the National Stock Exchange Fifty can be done using the futures and options only so, the person who has the long-term view or expectations from the market cannot deal in the NIFTY. This is so because in the case of the futures and options trading in only the near-month contracts can be done.
- The stocks that are considered in the index of the NIFTY are the large-cap stocks only, and it does not consider the mid-cap stocks as well as small-cap stocks, which give good opportunities to the investors who trade smartly as there is a great level of fluctuations in case of the mid-cap stocks and small-cap stocks.
It is the abbreviation used for National Stock Exchange Fifty. As the name implies, National Stock Exchange Fifty is the benchmark index of the NSE, which consists of 50 companies being most actively traded on the National Stock Exchange. The management of the National Stock Exchange Fifty index is done by the NSE Indices Limited, which was formerly known as India index services & products limited. As the NIFTY comprises of the stocks of the different companies from diversified sectors of the economy, trading in NIFTY provides an opportunity to invest in hedging its positionHedging Its PositionHedging is a type of investment that works like insurance and protects you from any financial losses. Hedging is achieved by taking the opposing position in the market. in an efficient and effective manner.
This has been a guide to the Full Form of NIFTY, i.e. (National Stock Exchange Fifty). Here we discuss how to calculate nifty along with its advantages, disadvantages, and differences. You may refer to the following articles to learn more about finance –