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S&P CNX Nifty Index (NSEI) |
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WIKI ANALYSIS
The S&P CNX Nifty is the headline index on the National Stock Exchange of India Ltd. (NSE). The S&P CNX Nifty tracks the behavior of a portfolio of blue chip companies, the largest and most liquid Indian securities. It includes 50 of the approximately 935 companies listed on the NSE, captures approximately 60% of its equity market capitalization and is a true reflection of the Indian stock market.
The S&P CNX Nifty covers 22 sectors of the Indian economy and offers investment managers exposure to the Indian market in one efficient portfolio. The index has been trading since April 1996 and is well suited for benchmarking, index funds and indexbased derivatives.
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].
Partnership
The S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between the NSE and CRISIL. IISL is India’s first specialized company focused on the index as a core product. IISL has a licensing and marketing agreement with Standard & Poor’s, who are world leaders in index services.
Highlights
The S&P CNX Nifty is a diversified 50 stock, market-capitalization-weighted index for India, accounting for 22 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.
The S&P CNX Nifty is based on solid economic research and is created for those interested in investing and trading in Indian equities.
Market Representation
The S&P CNX Nifty stocks represent about 60% of the total market capitalization of the National Stock Exchange (NSE).
Diversification
The S&P CNX Nifty is a diversified index, accurately reflecting overall market conditions. The reward-to-risk ratio of S&P CNX Nifty is higher than other leading indices, making it a more attractive portfolio, hence offering similar returns, but at lesser risk.
Liquidity
Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify for possible inclusion in the S&P CNX Nifty, it has to reliably have market impact cost below 0.75 %, when doing S&P CNX Nifty trades of five million rupees (Rs). The current impact cost of the S&P CNX Nifty for a portfolio size of Rs 5 million is 0.07%.
Hedging Effectiveness
The basic risk of the S&P CNX Nifty futures will be lower, compared to other index portfolios, owing to the superior liquidity of the S&P CNX Nifty constituent stocks and of the NSE. The S&P CNX Nifty has higher correlations with typical portfolios in India, compared to other indices. These two factors imply that hedging using S&P CNX Nifty futures is superior.
Index Family- S&P CNX Defty
The S&P CNX Defty is a U.S. dollar-denominated index based on the S&P CNX Nifty. This index has been developed to provide a benchmark to the international investors, providing them with an instrument for measuring returns on their equity investment in dollar terms. While the underlying S&P CNX Nifty is calculated in Indian rupees, the S&P CNX Defty is calculated and denominated in U.S. dollars. This ensures that the risk arising out of currency fluctuation is covered through the S&P CNX Defty.
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.
List of companies
The composition of the Nifty 50, as of November 24th, 2009[5]: (listed in the descending order of tentative market cap)
References
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