What is FINNIFTY? (Nifty Financial Services)

Key Takeaways:

• FINNIFTY is the ticker symbol of NSE’s Financial Services Index. It follows a free-float market capitalisation methodology.

• The index consists of 20 stocks, including private and public banks, financial institutions, NBFCs and insurance companies.

• NSE’s FINNIFTY has futures and options contracts that expire on the last Tuesday of every month.

• Finnifty share price movement depends on the stocks included in it.

Introduction to FINNIFTY

On January 1, 2004, NSE introduced the FINNIFTY, also known as the Nifty Financial Services Index, to track the financial sector of the country. Later, to allow traders to trade the index, NSE launched Finnifty derivatives on January 11, 2021.

The FINNIFTY index tracks the performance of the top 20 financial sector companies listed on the National Stock Exchange. This index includes private banks, public banks, NBFCs, life insurance, and other financial services companies.

It has become a popular benchmark for those interested in trading and investing within this segment of the share market. For traders, FINNIFTY offers opportunities through derivatives like futures and options. For investors, it provides insights into how India’s financial sector is performing.

This article discusses what FINNIFTY is, how it is calculated, how to trade FINNIFTY derivatives, its benefits and risks.

What is FINNIFTY in the Share Market?

FINNIFTY or Nifty Financial Services is a sectoral index designed by the National Stock Exchange. The motive of this index is to track the performance of financial services companies in the share market.

This index contains a maximum of 20 stocks. These stocks are from private banks, public banks, NBFCs, and insurance companies. To become eligible for the FINNIFTY index, a stock must be included in the Nifty 500 broader market index.

NSE followed a free-float market capitalisation methodology for the calculation of Finnifty. The index is reviewed semi-annually, usually on January 31 and July 31 each year.

How is FINNIFTY Calculated?

The FINNIFTY index is calculated using the free-float market capitalisation methodology. In this methodology, available shares for trading are only considered, excluding the promoter holdings.

The base value of the FINNIFTY index is kept at 1000, and a maximum of 20 stocks are included.

Formula for the FINNIFTY Index Calculation

FINNIFTY Index value = (Free-float market capitalisation / Base market capitalisation) x Base Index Value.

While calculating the index value, the companies with higher market capitalisation have been given high weightage.

This method of calculation ensures that the index reflects real market conditions and liquidity, making it highly relevant for traders.

How to trade in the FINNIFTY Index?

The FINNIFTY index has actively traded derivatives. NSE launched FINNIFTY futures and options contracts, which are traded on regular trading hours similar to Nifty 50 and Banknifty.

FINNIFTY Futures

To trade in FINNIFTY futures, just open a trading and demat account, activate the derivative NFO segment and follow the steps below:

• Search for FINNIFTY futures in the search bar.
• Analyse the FINNIFTY index chart
• If you think the FINNIFTY price will increase, buy futures contracts.
• However, if you think the FINNIFTY price will decrease, sell future contracts.
• The current lot size of the FINNIFTY is 60 shares (decided by the stock exchange).
• The FINNIFTY futures and option contracts expire on the last Tuesday of each month.

FINNIFTY Options

To trade FINNIFTY options, you need to buy/sell call and put options. The option contracts provide the right but not the obligation to buy or sell the index at a specified price before expiry.

If your index view is bullish, you either buy a call option or sell put options. However, if your view is bearish, you either buy a put option or sell a call option.

Option buying requires lower capital requirements compared to futures trading. Due to this, many traders are active in option buying.

Some of the popular option strategies used by FINNIFTY traders are straddle, strangle, Iron Condor, and spread strategies.

Who Should Invest or Trade in FINNIFTY?

Investors who are confident about the growth of the financial services sector and want portfolio diversification can invest in it. There are many listed FINNIFTY ETFs, which mirror the financial services ETF. Also, you can look to invest through mutual funds, which have a focused portfolio of financial services companies.

Traders who want to trade a volatile index and are capable of taking risks can trade in FINNIFTY futures and options.

Benifits of Trading in FINNIFTY

Trading in FINNIFTY offers several advantages, especially for those interested in the financial services sector.

• Sectoral Focus:

It allows traders to capitalise on trends in the financial services sector.

• Diversification Within Sector:

The FINNIFTY index includes banks, NBFCs and insurance companies, reducing single-stock risk.

• High Liquidity:

FINNIFTY derivatives are highly liquid, allowing traders to easily buy and sell contracts without much slippage.

• Hedging Opportunities:

Useful for investors holding financial sector stocks.

Risk of Trading in FINNIFTY

Trading in Finnifty also contains several risks:

• Sector-Specific Risk:

Any negative news in the financial services sector can impact the entire index.

• Market Volatility:

RBI policies, economic changes, and global factors directly affect the financial stocks.

• Leverage Risk:

Futures trading involves margin, which can amplify losses.

• Limited exposure to small-cap companies:

FINNIFTY primarily includes large-cap companies, limiting the exposure to small-cap companies.