Invest in Indices

There are thousands of equity stocks trading in the Indian stock market. And it is nearly impossible to analyze each stock to understand how the overall market is moving. Here is where a benchmark index can help. A benchmark index is simply a set of equity stocks that is used as a yardstick to measure the performance of other stocks listed in the market.

The Nifty 50 index, launched by the NSE on April 22, 1996, is one of the two main benchmark stock indices in the Indian markets. The other benchmark index is the BSE Sensex. As its name suggests, the Nifty 50 index includes the top 50 of the over 1,300 stocks listed on the National Stock Exchange (NSE).

The Nifty 50 index consists of the top 50 companies listed on the National Stock Exchange. These companies belong to different sectors of the economy, making the Nifty 50 index an inherently diversified investment option. As of February 2022, the Nifty 50 index includes the stocks of companies from 13 sectors of the economy.

The distribution of the index across these different sectors varies as shown below.

No, the Nifty 50 index does not change on a daily basis. Instead, the composition of this benchmark index is changed twice a year, during the Nifty 50 reshuffle. This index revision is performed according to precise and well-researched rules that are publicly documented, making the process transparent and straightforward. 

The primary aim of the Nifty 50 reshuffle is to ensure that each equity stock in the index continues to meet the required criteria laid down by the NSE. These revisions help the NSE ensure that only the 50 largest and most liquid stocks on the exchange continue to remain a part of the Nifty 50 index.  

The BSE Sensex, short for Bombay Stock Exchange Sensitive Index, consists of the 30 largest and most actively traded stocks listed on the BSE. These stocks typically belong to financially strong companies that function in different sectors of the economy, making the BSE Sensex a well-diversified index. Some of the sectors that the BSE Sensex stocks belong to include

• Finance
• Information technology
• Oil and gas
• FMCG
• Capital goods
• Telecom
• Healthcare 
• Chemical and petrochemical
• Power
• Consumer durables
• Metal, metal products and mining

The Nifty 50 index is a curated portfolio that represents a section of the market. Since it is essentially a benchmark, you cannot buy the index as such. However, you can invest in the Nifty 50 index in any of the following ways.

• Create your own portfolio of securities based on the Nifty 50 index 
• Trade in Nifty 50 index futures or options
• Invest in Nifty 50 index mutual funds or ETFs

Upstox gives you a simple and smart way to start investing in the Nifty 50 index through any of the above methods. You can purchase equity stocks mirroring the index directly via Upstox, trade in Nifty 50 index futures or options, or even invest in index funds. With pocket-friendly and transparent pricing coupled with an easy interface that supports quick orders, Upstox can bring the advantage of the Nifty 50 index to your portfolio.

The stock market indices listed on the National Stock Exchange can be classified into four main categories. The NSE has several stock market indices in each category as shown below.

Broad market indices like the Nifty 100, Nifty Next 50, and Nifty Midcap 100 consist of the largest and most liquid stocks on the NSE. Sectoral indices consist of the top stocks from various sectors of the economy, while strategy indices are created on the basis of different investment strategies. 

Thematic indices track the performance of stocks of companies that are linked to specific themes, such as ESG investing or consumption. Lastly, fixed income indices act as benchmarks for the fixed income market, which includes government securities, corporate bonds and money market instruments.

Much like the NSE, there are several stock market indices listed on the Bombay Stock Exchange as well. These indices can be classified into different categories, as shown below.

The Nifty 50 index is calculated using the free-float market capitalisation weighted method. Free-float market cap means that only those shares of the company that are freely available for trading by the public will be taken into account. The shares that are locked-in, such as those held by promoters or the government, are not factored in. 

Check out the steps involved in calculating the Nifty 50 index below.

Step 1: Calculation of market cap of each company

This is computed using the formula given below.

Market capitalization = (Shares outstanding) x (Current price per share)

Step 2: Calculation of the free-float market cap of each company

To compute the free-float market cap, you need to use the  Investable Weight Factor, which shows you how much of a company’s total shares are available for trading freely on the exchange. The formula is as follows.

Free-float market capitalization = (Market capitalization) x  (Investable weight factor or IWF)

Step 3: Calculation of the weighted free-float market cap of each company

Now, you need to use the weight assigned to each company in the index. You can use the formula given below.

Weighted free-float market cap = (Free-float market capitalization) x (Weight)

Step 4: Calculation of the current market value of each company

This is simply the sum of total weighted free-float market capitalization of all the stocks in the index. 

Step 5: Calculation of the index value

Lastly, to calculate the index value, you need the base market capital, which is the benchmark used to compute the Nifty 50. It has been set at 1000, with a base capital of Rs. 2.06 trillion. The formula you need to use is as follows.

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

The Nifty Bank index is one of the Nifty indices that is constituted on the basis of economic sectors. It consists of the largest and most liquid banking stocks listed on the National Stock Exchange. Currently, it includes 12 stocks from the banking sector, and is widely used as a benchmark for measuring the performance of this segment of the Indian economy.

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