Understanding NIFTY

 

S&P CNX NIFTY is an Index computed from performance of top stocks from different sectors listed on NSE (National stock exchange). NIFTY consists of 50 companies from 24 different sectors. NIFTY stands for National Stock Exchange’s Fifty.   The companies which form index of NIFTY may vary from time to time based on many factors considered by NSE.  NIFTY is for NSE similarly SENSEX is for BSE

 

Some mutual funds use NIFTY index as a benchmark meaning the mutual funds’ performance is compared against the performance of NIFTY. On NSE there are futures and options available for trading with NIFTY as underlying index. India Index Services and Products Ltd. (IISL) owns NIFTY.

 

IISL is a joint venture of NSE and CRISIL. CRISIL is a subsidiary of Standard and Poor (S&P). And so NIFTY is also called as S&P CNX NIFTY. CNX ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE and X stands for Exchange or Index. The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services. 

 

Nifty stocks represent about 63 percent of the Free Float Market Capitalization. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.50 laks is 0.06%. Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify for possible inclusion into the S&P CNX Nifty, it has to reliably have market impact cost of below 0.75 percent when doing S&P CNX Nifty trades of Rs. 50 Lakhs. S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.

 

S&P CNX Nifty always uses the best stocks possible for its index. The weakest stocks are removed from inside the S&P CNX Nifty and the new stock into it. The world changes, so the index should change. Yet, the change should not be sudden - for that would disrupt the character of the index. S&P CNX Nifty uses clear, researched and publicly documented rules for index revision. These rules are applied regularly, to obtain changes to the index set. Index reviews are carried out every six months to ensure that each security in the index fulfills all the laid down criteria. IDBI was once not listed; SBI was once illiquid; Infosys was once an obscure software startup. 

 

The world changes, and one by one, these stocks have come into the S&P CNX Nifty. Each change in the S&P CNX Nifty is small, so the continuity of the index is maintained. Yet, at all times, S&P CNX Nifty represents the 50 most important liquid stocks in the country, the best stocks to build an index out of.

 

NSE has the best surveillance procedures in India, so the extent of market manipulation is minimum. In NSE, since, the professional staff of the surveillance department has no positions on the market, this elimination of conflicts of interest and generates a more honest focus upon eliminating market manipulation. On a day to day basis millions of shares get traded on the NSE generating huge order flows. Due to the liquidity and order flow from numerous market players manipulation of the closing price becomes very hard. NSE is the most liquid exchange in India. Hence, the prices observed there are the most reliable. NSE has the highest trading intensity and their bid-ask spreads are the tightest.

 

 

Sister indexes of NIFTY

S&P CNX Defty

 

S&P CNX Defty is S&P CNX Nifty, measured in dollars. If the S&P CNX Nifty rises by 2percent it means that the Indian stock market rose by 2percent, measured in rupees. If the S&P CNX Defty rises by 2percent, it means that the Indian stock market rose by 2percent, measured in dollars.

 

 

S&P CNX 500

 

S&P CNX 500 is India’s first broadbased benchmark of the Indian capital market. The S&P CNX 500 represents about 86percent of total market capitalisation and about 78percent of the total turnover on the NSE. The S&P CNX 500 companies are disaggregated into 72 industries, each of which has an index called S&P CNX Industry Index. Industry weightages in the index dynamically reflect the industry weightages in the market. So for e.g. if the banking sector has a 5percent weightage among the universe of stocks on the NSE, banking stocks in the index would have an approximate representation of 5percent in the index. The S&P CNX 500 is a market capitalisation weighted index. The base date for the index is the calendar year 1994 with the base index value being 1000. Companies in the index are selected based on their market capitalisation, industry representation, trading interest and financial performance. The index is calculated and disseminated real-time.

 

CNX Nifty Junior

 

S&P CNX Nifty is the first rung of the largest, highly liquid stocks in India. CNX Nifty Junior is an index built out of the next 50 large, liquid stocks in India. It is not as liquid as the S&P CNX Nifty, which implies that the information in the S&P CNX Nifty Junior is not as noise-free as that of the S&P CNX Nifty. S&P CNX Nifty and the CNX Nifty Junior taken together constitute 100 most liquid stocks in India. S&P CNX Nifty is the front line blue-chips, large and highly liquid stocks. The CNX Nifty Junior is the second rung of growth stocks, which are not as established as those in the S&P CNX Nifty. A stock like Satyam Computers, which recently graduated into the S&P CNX Nifty, was in the CNX Nifty Junior for a long time prior to this. CNX Nifty Junior can be viewed as an incubator where young growth stocks are found. 

 

As with the S&P CNX Nifty, stocks in the CNX Nifty Junior are filtered for liquidity, so they are the most liquid of the stocks excluded from the S&P CNX Nifty. Buying and selling the entire CNX Nifty Junior as a portfolio is feasible. The maintenance of the S&P CNX Nifty and the CNX Nifty Junior are synchronised so that the two indices will always be disjoint sets; i.e. a stock will never appear in both indices at the same time. Hence it is always meaningful to pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock index or portfolio.

 

 

CNX MidCap

 

The medium capitalised segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the CNX MidCap Index is to capture the movement and be a benchmark of the midcap segment of the market. The CNX MidCap Index is a market capitalisation weighted index with its base period of the index being the calendar year 2003 and base value as 1000.The distribution of industries in the CNX MidCap Index represents the industry distribution in the MidCap segment of the market. All companies are evaluated for trading interest and financial performance.

 

CNX MNC Index

 

The CNX MNC Index comprises 15 listed companies in which the foreign shareholding is over 50percent and/or the management control is vested in the foreign company. The index is a market capitalisation weighted index with base period being the month of December, 1994 indexed to a value 1,000. Companies in the index should be MNCs and are selected based on their market capitalisation, industry representation, trading value and financial performance.

 

CNX PSE Index

 

As part of its agenda to reform the Public Sector Enterprises (PSE), the Government has selectively been divesting its holdings in public sector enterprises since 1991. With a view to provide regulators, investors and market intermediaries with an appropriate benchmark that captures the performance of this segment of the market, as well as to make available an appropriate basis for pricing forthcoming issues of PSEs, IISL has developed the CNX PSE Index, comprising of 20 PSE stocks.

 

CNX IT Sector Index

 

With the Information Technology (IT) sector in India growing at a fast rate, there is a need to provide investors, market intermediaries and regulators an appropriate benchmark that captures performance of this sector. Companies in this index should have more than 50percent of their turnover from IT related activities like software development, hardware manufacture, vending, support and maintenance. The index is a market capitalisation weighted index with its base period being December 1995 with base value 1,000.

 

NSE being the leading stock exchange in India, the NIFTY index is not only a prime index for the exchange itself but also it is an indicator of the booming Indian economy. Despite of the recent slowdown in the global economic scene the NIFTY index has sustained a regular growth after overcoming the sudden impact. The index for so many reasons has attracted investors not only from the domestic market but also from foreign countries.

 

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