What is the Meaning of Nifty?
Nifty, or rather Nifty 50, is the combination of two words, namely, National & Fifty. The reason for this integration is nothing but nifty 50 being the 50 active nationally traded stocks. Therefore there is no meaning of nifty other than being a term to describe these stocks.
Introduced on the 21st of April 1996 by the National Stock Exchange (NSE), Nifty serves its purpose as an equity benchmark index. However, the state of nifty determines how the country is performing. How you may ask? Think about it this way, If the businesses of a country earn well, they will pay higher taxes, meaning more money to the government. This means more money for government schemes and infrastructure projects and so on.
Therefore, if Nifty seems to be breaking new records on the high, it means that there is a positive sentiment in the country. Studying the current affairs will tell you exactly what is causing that positivity. On the contrary, if things seem off in the country, such as companies posting bad earnings, then Nifty starts to fall, for a while.
Criteria for Companies to be a part of Nifty
Since Nifty is a benchmark index of the entire country, they logically wouldn’t want to include stocks of unhealthy companies. So then what does it take to be a part of this index?
- Liquidity: First and most important, to be a part of this index, the stock should have been traded at an average impact cost of 0.5% or less for the last 6 months. Here, Impact cost is nothing but the cost for executing a transaction in a stock. This must be in proportion to its index weight, which is done by measuring by the current market cap.
- Domicile: The country must be a permanent part of India.
- Float adjusted Market Cap: Companies in the Nifty 50 must have a minimum of twice the float-adjusted market cap of the current smallest index company.
- Futures & Options: To be a part of Nifty 50, the stock of a company must be available for trade in the Derivatives Segment.
- IPOs: IPOs are not limited from being a part of this index if they are able to fulfill the above criteria. The two differences are, the float-adjusted market cap taken into consideration is that of 3 months. And, the company’s trading frequency must be 100% in the past 6 months. Trading Frequency is for how long the promoters retain their holdings.
What meaning should you take from Nifty?
As mentioned above, if India is doing well, Nifty seems to be doing well and vice-versa. You could use the change in Nifty50 to sort of determine how the trading day was. What if Nifty ends in the red? What you could take out of this is that there was more selling pressure than buying during that particular day. Similarly, if Nifty closes relatively high and green, it implies that there was considerable buying activity during the day. The reasons could vary and you will find the same by looking into the current affairs.
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