Stock Market Index is an Index that measures the stock market which helps the investors compare the current stock level with past prices and calculate market performance. It is basically a statistical tool which helps to reflect changes in the financial market. It is an indicator that reflects the performance of a certain segment of the market or the market as a whole.
A stock market index is created by selecting certain stocks of similar companies or those that meet a set of pre-determined criteria. These shares are already listed and traded on the stock exchanges. Performance of the stock market is proportional to the performance of the underlying stocks and that makes up the index. So if the prices of the stocks goes up the index also goes up. So what are the types of Stock Market Indices?
- S &P BSE SENSEX
- CNX NIFTY (NIFTY 50)
Let us understand what each index mean
S & P BSSE SENSEX
It is a free float market weighted stock market index of 30 well established and also financially sound companies listed on Bombay Stock Exchange. It was published on 1st January 1986, the S & P BSE SENSEX is considered as the pulse of domestic stock markets in India. The base value of the SENSEX was taken as 100 on 1st April 1979 and its base year as 1978-79. It was on 25th July 2001 BSE launched DOLLEX-30, a dollar linked version of the SENSEX.
CNX NIFTY (NIFTY 50)
The CNX Nifty is a flagship index on the National Stock Exchange of India Ltd (NSE). The index tracks the behavior of a portfolio of blue chip companies, the largest and most liquid Indian Securities. It includes 50 of the approximately 1600 companies listed on the NSE captures 65% of its float adjusted market capitalization and is a correct reflection of Indian Stock Market. It covers the major sectors of the Indian Economy and offers investment manager’s exposure to the Indian Market.
In January 2021, the National Stock Exchange (NSE) launched Nifty Financial Services which is called as FINNIFTY. This includes financial institutions like banks, insurance companies, housing finance and other companies who offer financial services. This index includes certain number of stocks in different weights.
IN THIS ARTICLE WE WILL DISCUSS ABOUT FINNIFTY IN DETAIL
WHAT IS NIFTY FINANCIAL SERVICES INDEX?
The Nifty Financial Services Index commonly known as FINNIFTY tracks performance of Indian Financial Services. It includes index of 20 stocks and stock weights are based on free float market capitalization. Its base value is 1000.
Free Float Market Capitalization = Shares outstanding * Price * IWF
IWF= Investible Weight Factors
A higher IWF is indicative of more shares under public shareholding listed. Financial entities are very crucial for the success and survival of the economy especially in countries like India where the economy is continuously undergoing changes. Banks lend to borrowers from the surplus savings. FINNIFTY basically aims to reflect the behavior of the above mentioned sectors and sub sectors in the economy. So in short it can be said that FINNIFTY is the symbol of Nifty Financial Services. In order to be included in FINNIFTY companies should be included in NIFTY 500. The weight of each stock is based on free float market capitalization factor.
LIST OF FINNIFTY STOCKS ALONG WITH WEIGHTAGE
FINNIFTY CONTRACT AND SETTLEMENT PROCESS
The Nifty Financial Services Index Derivatives are settled in cash with expiry day being the last Thursday of the expiry month for the monthly contracts and Thursday of the expiring week for weekly expiry contracts. NSE is offering futures and options in 7 serial weekly excluding the monthly expiry & 3 serial monthly contracts.
SECTORS INVOLVED IN FINNIFTY
Banks represent a weightage of 63.1% of FINNIFTY, 20.3% of Nifty 500 Index, and 100% of Nifty Bank Index. Insurance Companies hold 8.0 % weight in FINNIFTY, 2.5% in Nifty 50 and Nifty 500. These subsectors have more exposure by this index as compared to broad market indices and FINNIFTY gives more targeted approach when it comes to investors on the lookout for certain sectors.
ELIGIBILITY CRITERIA FOR GETTING LISTED IN FINNIFTY
Only those companies are included in the Fin Nifty index whose average free-float market capitalization is 1.5X of the average free-float market capitalization of the smallest constituent of the index. No stock is given a weightage of more than 33%. Also, the weightage of the top three stocks cumulatively should not exceed 62% at the time of rebalancing, which happens semi-annually
HOW TO INVEST IN FINNIFTY STOCKS
The first step to invest in Fin Nifty stocks is to open Demat Account. Also before investing all necessary advice should be taken in to consideration. Investors cannot directly invest in the index. They can do through mutual funds schemes that has higher weightage and in order to buy FINNIFTY stocks the investor needs to buy the entire 20 stocks for which corresponding weights are mentioned.
WHY SHOULD ONE INVEST IN FINNIFTY
The primary advantage of investing in FINNIFTY is it brings down the non-systematic growth. Unsystematic risks include financial and business risks. Nonsystematic risk includes events such as strikes, rise in financial cost, and reduction in profit, drop in sales or even natural disasters. Diversification can reduce these risks to some extent.
FIN NIFTY Index has performed well with its diversified exposure to various sectors in the economy. It has so far provided returns up to 18.64%. FINNIFTY Index has performed better on CAGR point to point basis. For any investor the key point to remember is portfolio diversification and research. Understanding the basics along with the experience and patience can bring good returns. So in short we can say that FIN NIFTY has been performing very well and many investors are nowadays investing in these stocks.