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How was Nifty created and how its price is calculated?

PurpleTrades - stock market courses > Blog > How was Nifty created and how its price is calculated?

Nifty is a broad market Index that takes into account various sectors that are available in the Indian market. The sectors include IT, FMCG, Pharma, Telecom etc. Now let us understand how an Index is created with the help of the following example.

 

Let us make our own index with 3 companies which are X, Y and Z. The respective price of these companies are 100, 40 and 70. The number of outstanding shares for them are 40, 80 and 50 respectively. We will represent all these data in a tabular form in excel for better understanding.

 

Now with the help of the price of each company and the total outstanding shares, we will calculate the Free Floating Market Capitalization. Free Floating Market Capitalization is the product of the total number of non-promoter holding or outstanding shares and the price of the stock.

 

The summation of the Free floating market capital of all the stocks present in our Index is known as Base Market capitalization. Which is 4000+3200+3500=10700

 

Let us now assume a certain amount of points for our Index. When Nifty was firstly introduced by NSE on 3rd November1995, it was assumed by NSE that Nifty was worth 1000 points. So for our Index we will also assume certain points, let’s say 100 points.

 

Hence 100 points= 10700. The entire scenario is shown below.

 

Now let us wait for one year and then see how our Index performed. After an year let us say Company X gained 15 rupees, Company Y lost 5 rupees and Company Z gained 10 rupees. Hence the new scenario would be like.

 

The number of shares of the companies did not change, only the price changed over the period of 1 year, hence the new Free floating Market Capitalization would be as follows-

 

Remember when we started our Index, its value was 100 points. Now let us calculate its value after a year. The formula for calculating the new Index value is given as

 

New Base Market Capital is 11,400. Initial Base Market Capital was 10,700. Initial points were assumed to be 100.

 

Hence the value of our Index is calculated to be-

 

Hence the value of our Index after a year is 106.54 points.

 

 

Let us calculate the value of Nifty for 20/02/19

So now with this logic, we can now understand how Nifty is calculated and how it was started.

For calculating the current price of Nifty (calculated on 20/02/19 after the market closed at 3:30PM)

  1. The base points for Nifty in 1995 were set to be 1000.
  2. The base market capital of Nifty on 5th November 1995 was Rs 2.06 trillion.
  3. As of now, on 20/02/19 the total base market capital for Nifty is Rs 22.115 trillion

Let us represent these in a tabular format in excel

 

Hence now using the same formula that we used before.

 

The current value of Nifty using the above formula comes to be-

 

This is how Nifty price is calculated and how it all started for Nifty.

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