The stock market has occupied prominent space in the news over the last year and a half, for a number of reasons. First, many were astonished at how despite the economic peril that was brought about by the world being brought to a standstill, the stock markets as a whole, especially in India were in comparison, not affected much. Alternatively, once the initial ‘fear of the unknown state’ wore off from the country’s atmosphere, the markets began to rally, with multiple benchmarks reached untapped highs, and companies using this stock market gold rush to file for a flurry of IPOs, from Zomato, Aditya Birla Sunlife AMC, and most recently, the highly coveted Paras Defence and space technologies limited.
Some of these benchmarks include the SENSEX, NIFTY50, NIFT100, NIFTY200 and so on and so forth. Arguably, NIFTY50 stands to be the most popular one of the lot and taking a look at its constituents, you are likely to recognise most of the stocks it consists of.
But what is NIFTY 50, how does it function, and what exactly is a benchmark index? In fact, what is an index? We all will answer all these questions in this article.
The Original NIFTY50
At the risk of skipping ahead, NIFTY50 is the name given to the benchmark index listed on the National Stock Exchange (NSE) of India. However, this name is not the first time the name “NIFTY” has seen action on the stock market.
NIFTY Fifty in previous decades was the name given to large-cap stocks in the US markets of the 1950s and 1960s, stocks that were considered blue-chip and a ‘buy only’ stock. Considered pillars of the economy, with strong fundamentals to show, these stocks only attracted “buy” recommendations. However, as much as the stocks rallied, the harder they were brought down during the 2008 crash. While there were attempts to put it back together after the crash, these were less than a resounding success.
The ‘New’ NIFTY 50
When the NSE was set up in Mumbai in 1992, its managing team needed a strong pole to lodge in the financial ground to solidify their place in the dematerialized markets space. They found this in the form of the new NIFTY 50. Nowadays, when someone asks “what is NIFTY 50” or “What are NIFTY 50”, they are referred to this benchmark index for the NSE.
The NIFTY 50 index is made up of 50 stocks that are prominent figures in the Indian stock market. From companies such as Asian Paints and a slew of HDFC and Tata companies (Titan for instance), the benchmark index is considered by investors to be one of the most accurate litmus tests for the Indian stock markets. If the NIFTY 50 is in the red, chances are the market is too. If it isn’t, most likely it will soon make its way down there.
What is an index?
Before we move on to further exploring what NIFTY 50 and what are NIFTY 50 stocks are, we must first understand what exactly an index or a benchmark index is.
In its simplest terms, an index is a basket of securities that is created as a representational sample of a certain sector in the markets. This representational sample then works as a barometer to test market performance. For instance (and purely as an example), if you wanted to measure market performance for the fintech sector, you would create a basket of stocks made up of the most well known and well-established fintech companies. This weighs the average performance of all these companies, giving out one singular number, or the price of the index. If the price of the index falls, this means the stocks in the basket of securities are not performing well, which means the market at large is likely not doing too well either. The converse holds true as well.
Understanding the NIFTY 50
While the NIFTY 50 is now a much relied upon barometer for how the Indian stock markets are performing at large, it has been meticulously constructed over time in order to achieve this status. The benchmark index is made up of stocks belonging to 13 of the country’s sectors in order to achieve diversification. The sectors are as follows:
– Oil and gas
– consumer goods
– information technology
– financial services
– cement products
– media and entertainment
This provides key insight into not only ‘what is NIFTY 50’, but also into exactly why the benchmark index is, well, a benchmark index for the Indian markets. With stocks from almost all major sectors, with the companies from these sectors being chosen for the index being leaders in their segments, the NIFTY 50 functions as an indication of the performance of Indian markets because it is in and itself a small sample representation of the best offerings of the Indian markets; If the stocks in NIFTY 50 are not performing well, it is very likely that the economy at large will not be able to escape the adverse effects that are bringing the index down.
NIFTY 50 is one of the most common names you will hear while discussing stock markets or having any market-related conversations, and for good reason. Conversations about the performance of markets and the NIFTY 50 have similar tones, as the NIFTY 50 is but a benchmark index for the Indian markets at large.
While the index is an accurate indicator of market performance, it might not be so for economic performance at large. This is due to the fact that unlike other countries such as the US, which derives a big chunk of its economic activity and economic value from its markets, Indian markets contribute but 13-15% of the country’s economy. Therefore, it could be the case that NIFTY 50 is not performing well, but the economy is. Something like an agricultural boom (agriculture is still the most prominent sector in the country), which would benefit the economy as a whole, may not be specifically reflected in the stock markets save for in the movement of those companies that have a large agricultural footprint. Once again, vice versa is possible as well.