Nifty 50: How does it actually work?
What's the story
Post periodic review by India Index Services and Products (IISL), the National Stock Exchange's (NSE) will move ACC, Bank of Baroda, Tata Power and Tata Motors DVR from its benchmark Nifty 50 index. They will be replaced by Bajaj Finance, Hindustan Petroleum Corporation, and UPL. That's all well and good, but what does it actually mean? Well, glad you asked.
Nifty
There are 12 sectors
Nifty, which is owned and managed by India Index Services and Products (IISL), is a diversified 50 stock index, which denotes the ups and downs of the 12 major sectors of the Indian economy. The sectors as per weightage are: Financial Services, Energy, IT, Automobile, Consumer Goods, Pharma, Metals, Construction, Telecom, Cement & Cement Products, Services, Media & Entertainment.
Base value
You have a base period
It's computed using a free float market capitalization weighted method. The prices on November 3, 1995, has been chosen as the base period, as on this day NSE's Capital Market Segment completed one year of operations. Factors like constituent changes and corporate actions are also taken into account. The base value is set at 1000 and the base capital is Rs. 2.06 trillion.
Inclusion
How are the stocks chosen?
For inclusion, "the security should have traded at an average impact cost of 0.50 percent or less during the last six months for 90 percent of the observations for a basket size of Rs. 2 crore," as per NSE norms. A firm coming out with an IPO is also eligible if it meets the eligibility criteria. Its period has been shortened to 3 months.
Replacement
How are they replaced?
A stock gets replaced due to either of these two reasons - because of mandatory changes, like corporate actions, delisting and such factors, or when there is a better candidate available to take its place in the index. However, it's not necessarily a bad thing. If a company manages to perform well again and fulfills inclusion norms, it gets reinstated back into the index.