The National Stock Exchange (NSE) of India is one of the most renowned stock exchanges around the world for online trading, and it also holds a prominent position of being the first demutualized electronic exchange in India. Nifty 50 is its flagship index that comprises the stocks of fifty companies demonstrating stellar performance in various sectors, such as financial services, FMCG, IT, healthcare, Iron & steel, oil & gas, automobiles, etc.
It is undoubtedly one of the primary driving agents of the Indian online stock market, and it is also used to gauge the sentiments of the Indian equity market. NSE serves as an ideal platform for Indian investors to let them trade derivatives like futures, options, and equities. Still, with Nifty at its core, we will discuss how crucial it is for the capital market of India.
The index methodology that Nifty 50 follows revolves around the current value of stocks available for trading on the trading apps and its comparison to the combined worth of these stocks to a set point. Nifty is basically a barometer that determines the economic health of the nation and guides investors to choose the stocks in which they want to invest their money.
The process to calculate the Nifty 50 index:
- The method that is applied to compute this is known as the free float market capitalization-weighted method, which sounds complex. Here is the simplified explanation for the same:
- The first step includes selecting the stocks according to the eligibility criteria, which means sorting the stocks depending on their liquidity, trading frequency, and market capitalization. NSE has this criterion listed in advance for the stocks to be considered.
- Free float market capitalization: When we talk about free float stocks, we mean the stocks that are readily available for buying or selling, unlike the ones held by giant company founders, governments, or long-term investors. The market capitalization of any company is calculated by multiplying the price of one share of that company by the total number of free-floating shares. Therefore, when index calculation is done by this method, the total number of stocks that are taken into account are the ones that are readily available to be traded in each company of the index.
- Calculation of index value is done with the following formula:
(Sum of (Market Capitalisation of Stock * Free Float Factor) / Base Market Capitalisation) * Base Index Value.
The free float factor indicates the percentage of shares that can be bought or sold. At the same time, the base market capitalization and the base index value are standard values determined on a particular starting date.
- Regular review of stocks: NSE periodically reviews the stocks to ensure that stocks meet the eligibility criteria. If there is a fluctuation of any kind for some stocks, then they will be substituted by other stocks that fit better.
How to invest in Nifty 50 stocks?
- Begin by doing the right amount of research for selecting either individual stocks from the index or the entire index of Nifty 50.
- For individual stocks, ideally, those companies prefer to buy stocks that have decent growth potential and have projected an applaudable performance in recent years.
- Proceed ahead to place the purchasing order using a trading account by specifying the number of stocks. A demat account will be required to complete the process virtually.
- Meanwhile, keep monitoring the performance of these stocks and stay updated with all the latest buzz of national stock exchanges.
The end goal of gaining a return on investment depends to a great extent on the exit strategy an investor implements. Therefore, knowing when and how to sell depending on the predetermined goal is the key, and one who has expertise in this will get the larger piece of cake.
Trading and risk go hand in hand. Nifty 50 stocks are no exception to this. Hence, one must move ahead with due diligence, carefully navigating the volatile water and taking one step at a time. Key to long-term growth is patience, awareness, and resilience in this dynamic landscape of uneven terrains.