S&P CNX Nifty Index (NSEI)

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Revision as of 11:42, November 18, 2008

The Standard and Poor's NSE Index, also called the Nifty is the benchmark index for large cap companies by amount of liquidity on the National Stock Exchange in India. It covers 25 sectors of the Indian economy, 50 of the most liquid blue chip stocks and covers 60% of the total market capitalization of the NSE[1].

Weighting and Calculations

Like most S&P indices, the Nifty is a market capitalization weighted index based on the free float method. They involve the total market capitalization of the companies weighted by their effect on the index, so the larger stocks would make more of a difference to the index as compared to a smaller market cap company. The basic formula for any index is (be it capitalization weighted or any other stock index)[2]:

• Index level= Σ(Price of stock * Number of shares) * Free float adjustment factor/ Index divisor

The Free float adjustment factor represents the proportion of shares that is freefloated as a percentage of issued shares and then its rounded up to the nearest mulitple of 5% for calculation purposes. To find the free-float capitalization of a company, first find its market cap (number of outstanding shares x share price) then multiply by its free-float factor. The free-float method, therefore, does not include restricted stocks, such as those held by company insiders.

While one might track this portfolio’s value in dollar terms, it would probably be an unwieldy number – for example, the S&P 500 market value is roughly \$11.8 trillion. Rather than deal with ten or more digits, the figure is scaled to a more easily handled number, currently around 1250. Dividing the portfolio market value by a factor, usually called the Index divisor, does the scaling.

Continuity in index values is maintained by adjusting the divisor for all changes in the constituents’ share capital after the base date. This includes additions and deletions to the index, rights issues, share buybacks and issuances, and spin-offs. The divisor’s time series is, in effect, a chronological summary of all changes affecting the base capital of the index. The divisor is adjusted such that the index value at an instant just prior to a change in base capital equals the index value at an instant immediately following that change[3].

Composition

Eligibility

For companies to be eligible for the Nifty, they need to satisfy the following criteria as per the S&P rules[4]:

• Liquidity: Liquidity is measured by impact cost of the company on the index. Each company must have traded at an average impact cost of 75% or less for the preceding six months for 90% of the trades. Impact cost measures the difference between the ideal selling price of a security and the actual price. This is the percentage mark up suffered while buying/selling the desired quantity of a security compared to its ideal price -- (best buy best sell)/2. The more liquid a security, the greater the chance that its shares trade at prices close to the ideal price. Highly liquid securities have very low impact cost.
• Market Capitalization:Each company must have a market capitalization equal to or exceeding Rs. 5 billion for the preceding six months.
• Public Float: Each company must have at least 12% of it outstanding shares available for public trading.
• Domicile: The company must be domiciled in India and trade on the NSE.
• Securities: Convertible stock, bonds, warrants, rights, and preferred stock that provide a guaranteed fixed return are not eligible.