By: Ruma Koley
"The greatness of your performance comes not from what you buy, but from what you exclude." - Howard Marks
Before talking about Index changes we look into the term “stock market” where several exchanges happen in which shares of publicly held companies are bought and sold. These financial activities are conducted through formal exchanges and via OTC (over-the-counter) marketplaces that operate under a defined set of regulations.
Index weightage assumes importance in any stock market. In India, the Nifty has 50 stocks, and the BSE Sensex has 30 stocks. The indices of both Nifty and BSE are weighted by free-float market cap. So, we can say the weighted is done based on stocks that are not under promoter control.
To understand the index weightage, we need to understand how stocks are weighted. The Index is a composition of many stocks from different sectors that mainly represent the economy’s state. The index is a hypothetical portfolio most representative of the market as a whole and the economy. The stock should qualify for certain criteria to include in the index. Those criteria are- current and projected profitability; capital structure; asset utilization; earnings momentum and intrinsic, rather than the market, value. Once approved as index stock, it should continue to qualify on these stated criteria.
For a stock to qualify for holding in the NIFTY 50, it has to reliably have a market impact cost below 0.50 %, when doing NIFTY 50 trades of Rupees Rs.10 crores. On 12th June 2000, the NSE (National Stock Exchange of India Limited) commenced trading in derivatives with the index future.
Now the question is, How is stock weightage Calculated?
There are different ways to calculate weights, but India’s stock market mainly follows the globally accepted and benchmarked “free-float market capitalization” method of weighting. The weights are calculated based on the company’s free-float market capitalization and the larger the market capitalization, the higher the weight.
Another way to determine stock weightage is simple enough. Simply divide each of the stock position’s cash by the total portfolio value, and multiply by 100 to get to a percentage.
Nifty 50 Index
The NIFTY 50 is an assorted 50 stock index accounting for 13 sectors of the economy. It is used for a variety of purposes such as index-based derivatives, benchmarking fund portfolios, and index funds. NIFTY 50 is managed and owned by NSE Indices Limited. NSE Indices is India's specialized company focused on the index as a core product.
It represents about 62% of the free float market capitalization of the stocks listed on the NSE as on September 30, 2022.
The total traded value of the NIFTY 50 index selects for the last six months ending September 2022 is approximately 41% of the traded value of all stocks on the NSE.
How Nifty 50 Index is calculated?
“Float-adjusted and Market Capitalization method” which represents the overall market value of all the Nifty 50 stocks relative to the base period (Base year- 3rd November 1995), is used for calculated changes in the Nifty 50 Index.
Steps for calculation:
1. Calculate the market capitalization.
2. Multiply the market capitalization with the IWF (Investable weight factor).
3. Then calculate the weighted free-float market capitalization.
4. The last step is to calculate the index value.
Top 5 sector which has higher weightage on nifty 50 (2022)
The NIFTY 50 Index gives a weightage to financial services at 36.96%, Energy at 13.41%, IT at 14.22%, consumer goods at 8.75%, Automobiles at 6%, and Healthcare at 3.78%. The NIFTY 50 index is important to highlight that the Nifty 50 weightage of sectors keeps changing according to the performance of constituent stocks.
The top 5 mid-cap stocks in Nifty 50 are: Aarti Industries, Alkem Laboratories, Apollo Tyres, Ashok Leyland, and Astral.
The top 5 small-cap stocks in Nifty 50 are: Arvind Fashions, Avanti Feeds, Bajaj Electricals, Canfin homes, and CEAT.
Top 7 stocks which have higher weightage on Nifty 50 (2022):
Excluded Stocks from Nifty 50:
The stocks that are excluded from the index Nifty 50 are
The above stocks will be replaced by
The reason behind this exclusion is a list of new eligible stocks is drawn up to review against the current index constituents twice a year and in case any changes are to be made, then the smallest constituents are excluded and new stocks are replaced with them. Exclusion can also happen because of a spin-off, merger, or acquisition. Some companies were excluded from the outflow from the passive funds.
The stock should have less in the last six months for 90% of the observations or an average impact cost (It is the cost a seller or buyer incurs while executing a transaction.) of 0.5% and should have at least twisted the float-adjusted market capitalization of the current smallest index. Rather than that to be eligible for inclusion the stock must be available for trading in the futures and segment on the NSE and also the company must be domiciled in India and traded on the exchange.
As a conclusion, we can say, over the years, in Nifty-50 the sectoral representation has undergone a huge change, in consonance with the changes in the underlying economy new sectors have evolved, while some of the dominant sectors of the economy have lost relative importance in India.
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