The nifty 50 index is calculated using the free-float market capitalization weighted method .That represents the current value of all stocks in the index relative to a base period value i.e., November 3, 1995 .
The Nifty 50 is an index that includes the top 50 companies of India by market capitalization that are listed on the National Stock Exchange (NSE). It shows the overall performance of these 50 companies and is used as a barometer to measure the performance of the Indian market.
The performance of these companies keeps changing and, accordingly, the value of the Nifty index. As of September 29, 2022, the Nifty is currently trading at 16,818; this figure is known as the index value. Today we will see how the Nifty Index value is calculated.
How is NIFTY 50 calculated?
The NIFTY 50 is calculated using the free float market capitalization weighted technique using the following formula:
Index Value = (Current Free Float Market Cap./Base Market Capital) * Base Index Value
Free-float Market Capitalization = Market Cap * IWF
Market capitalization = Shares Outstanding * Current Share Price
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IWF is Investible Weight Factors, which is the unit that represents the number of shares of the company available for trading. Every company has a calculated IWF value.
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Base Market Capital , for Nifty the Base Market Capital is Rs 2.06 Trillion which is the aggregate market capitalization of the index during the base period i.e., on November 3, 1995.
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and Base Index Value of Nifty is 1,000.
Nifty Fifty Explained with Example:
Let’s understand this through an example -
Assume that companies A, B, C, and D make up an index. The hypothetical information about the companies is as follows, with all values in INR with Base Index Value as 1,000 and Base Market Cap as Rs 10,000.
Therefore, Index Value = (32,000 /10,000)*1000 = 3,200
So, our hypothetical Index will have 3,200 current Index Values. Similarly, we can find for Nifty 50 by calculating the free float market capitalization and using that formula.
Why IWF is needed?
The Investible Weight Factors determine the percentage share available for trading of a particular company. This is necessary because not all of the company’s shares are available for trading and some of them are held by the company’s owners, their families, its promoters, or the government. As a result, they must be excluded when calculating the index.