Nifty50: What is it and how does it work

A stock market is a place where investors, both institutional and individual, come together to buy and sell shares or stocks. In today’s environment, these exchanges happen mostly in electronic marketplaces. The prices of shares and stocks are set by supply and demand value in the market, depending on the buyers and sellers placing orders.

Difference between primary and secondary market

The primary market is the place of creation of securities. Firms sell or float their fresh stocks and bonds to the public for the first time in primary markets. An IPO is an example of the primary market. The trade gives investors a chance to purchase securities from the bank that facilitated the initial underwriting. IPOs are for private companies selling new stock in the market for the first time.

A rights offering allows a company that already has securities to raise additional equity through this market and enter the secondary market. More examples of the primary market are private placement and preferential allotment. The former lets a company sell directly to bigger investors like banks or hedge funds, without having to make the value of the shares public. The latter gives shares to a few big investors at a price lower than what is available to the public.

The secondary market is popularly referred to as the stock market. Every major country has a big-league stock market. The secondary market is where investors buy and sell stocks amongst other investors and not companies. In the primary market, the company selling the shares is directly involved with the buyer. In contrast, in the secondary market, you can buy the stock from an investor who has shares in the company without its involvement.

Bondholders sell bonds on the stock market for a good profit, assuming their interest rates have decreased since the issue of the bond; other investors find great value due to a higher coupon rate.

What is Nifty50?

The Indian stock market has two major stock exchanges, The BSE-Bombay Stock Exchange and The NSE-National Stock Exchange. Nifty is the official benchmark index of the NSE that was introduced in 1996. Nifty or Nifty 50 is derived from the words National and Fifty, representing the weightage of 50 major companies in India. Nifty share prices are meant to reflect the well-being of the stocks and values of the top 50, hence the broader economy in all conditions.

Nifty comprises fifty actively traded stocks, and currently, there are fifty-one. Nifty50 is also known as CNX Nifty, which is owned by India Index Services and Products Ltd. (IISL). IISL is a specialised company focusing on an index as its main product, and Nifty is one of the largest financial products.

Eligibility requirement to join Nifty

Companies need to satisfy the following parameters and criteria to be eligible for being a part of Nifty50.

• Liquidity: A company’s stocks must have been traded at the cost of 0.50% or less at an average in the last 6 months.
• Float Adjustment: Market capitalisation of a company, which has been float-adjusted, must be twice of the current index constituent.
• Domicile: The Company should be domiciled in India and must already trade on NSE.

How can the Nifty50 be calculated?

Nifty is calculated with the help of the free-float market capitalisation-weighted method. The final market value of stocks relative to a particular period is reflected in the index’s level.

Market capitalisation = Equitycap*cost

Free float market capitalisation= Equitycap*cost*investable weight

Index value= Current market value/Base market capital* Base index value (1000)

The index is calculated in real-time as the value of scrip changes.