nifty cnx 50

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NSE NIFTY 50 Index

Prepared byShekhar Yadav

[email protected]

June 2012

Have you ever wondered how are the companies listed on NSE become a part on NSE

Index i.e. Nifty 50?

I will try to explain these concepts. Let us begin with S&P CNX Nifty or Nifty 50 or Nifty.

Nifty is an Index used in National Stock Exchange. The Index track the trading behaviour of

the 50 largest companies listed on NSE giving a representation of the entire market. The 50

companies are selected from 21 sectors which in a way represent all the sectors in the

Indian market. The list of Index companies is revised every 6 months and a 6 week notice is

given to the market before making any changes. The Index Nifty represents roughly about

65% of total free float market capitalization of all companies listed on NSE i.e. of the total

100% market cap of Nifty around 65% can be attributed to these 50 companies

The Index or S&P CNX Nifty or Nifty 50 or Nifty is calculated by IISL (Indian Index Services

and Products ltd). IISL is an joint venture between NSE and CRISIL. CRISIL stands for Credit

Rating Information Services of India Ltd and it is a Standard and Poor’s company (popularly

known as S&P) which is the global leader in terms of Index Services. Thus the name CNX –

Crisil NSE Index.

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Now I would explain how are the companies selected for the Index or what are the criteria

that these companies needs to fulfil. There are 6 criteria to be full filed to be a part of the

index:

1. Float Adjusted Market Capitalization

2. Liquidity or Impact Cost

3. Float

4. Domicile

5. Eligible Securities

6. Other Variables

1. Float Adjusted Market Capitalization: (top priority)

The method used earlier to find Market Capitalization for the Index used to consider

Total Market Capitalization which is the entire share of the company i.e. 100% of theCompany’s shares multiplied by the CMP( No of Shares * CMP). But since June 26

th

2009, Float Adjusted Market Capitalization has replaced the old method. It gives a

much better representation of the Market Capitalization. By Float I mean the

percentage of shares that have been issued by the Company to be traded in the

market. Generally a company comes for an IPO with a certain % of total shares like

15-20% and the rest is held by the Promoters and other entities.

Formula for Float Adjusted Market Cap ={CMP * Total number of shares * Float

factor}

Float factor=10% if an company has issued 10% of its shares into the market

For example the recent IPO of Speciality restaurants (owner of restaurant chains

Mainland china, Oh! Calcutta, Machan etc) issued 25% of its share to public. In this

case the float factor would be 0.25

2. Liquidity or Impact Cost: (second most important requirement)

By Liquidity I mean the number of buyers and sellers readily available for a stock in

the market. The larger the number of buyers and sellers in the market, the higher is

the liquidity of the market. Liquidity can be found out by looking at the traded

volume of the company’s stock.

In order to measure liquidity for an Index company Impact Cost is calculated. Impact

cost is based on the Bid-Ask spread for any stock (Bid-Max price that Buyer is willing

to pay, Ask-Min price that the Seller is willing to accept).

For a Company to qualify as an Index company its Impact cost would be less than

or equal to 0.5% for 90% of the total observation.

Calculation of Impact Cost: Step1:

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Ideal Price is calculated.

Ideal Price=(best bid price+ best Ask price)/2

Step 2:

Average Buy price is calculated. Buy price is the price at which someone is buying theshare.

Step 3:

Impact Cost= (Average Buy price- Ideal price)/Ideal Price

I have two random companies and illustrated the calculation of Impact cost.

Buy

Quantity Buy Price Sell Quantity

Sell

Price

1000 2233.25 500 2233.5

500 2233.35 1000 2233.6

Ideal

price (2233.25+2233.45)/2 2233.4

For Buying 1500

shares

Average

Buy

price (500*2233.45+1000*2233.55)/1500

2233.52

Impact

Cost

(Average Buy price- Ideal

Price)/Ideal Price

0.00746%

less than

0.5%(qualified)

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3. Float:

Companies should have at least 10% of

shares available to Investors. Float is a

factor representing stocks which are not

held by any firm’s promoters or other entities.

4.

Domicile:Company should be in India and registered with NSE.

5. Eligibility:

All the Stocks listed on NSE are eligible to be a part of S&P CNX Nifty if it satisfies all

the criteria for 6 months.

6. Other Variable:

A company which comes out with an IPO is eligible to be part of an IPO if it fullfills

the above 5 requirement for 3 months and for any company already registered with

the NSE they need to fulfil the above 5 requirements for a period of 6 months. The

advantage is given to IPO companies because it is difficult for a new company to

achieve the requirements for the first 3 months.

Source: www.nseindia.com

Note: CMP- Current Market Price

On September 27th

2012, SAIL and Sterlite Industries were replaced by Ultratech

Cement and Lupin in the Nifty 50 index.

Buy

Quantity Buy Price

Sell

Quantity

Sell

Price

1000 346 500 347.5

500 347 1000 349

Ideal

price (346.55+347.2)/2 346.75

For Buying 1500 shares

Average

Buy

price (500*347.2+1000*347.5)/1500

348.50

Impact

Cost

(Average Buy price- Ideal

Price)/Ideal Price

0.5046864%

Greater

than 0.5%

nifty cnx 50

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