InvestorQ : Can you explain to me the mathematical formula for the calculation of the Nifty index in the context of the NSE?
manisha Kolvenkar made post

Can you explain to me the mathematical formula for the calculation of the Nifty index in the context of the NSE?

Answer
user profile image
Mahima Roy answered.
1 year ago


Price Index Calculations

The NIFTY 50 is computed using the free-float market capitalisation weighted method wherein the level of the Index reflects the total market value of all the stocks in the Index relative to the base period November 3, 1995. The total market cap of a company or the market capitalisation is the product of market price and the total number of outstanding shares of the company.

Market Capitalization = Shares outstanding * Price

Free Float Market Capitalization = Shares outstanding * Price * IWF

Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)

Base market capital of the Index is the aggregate market capitalisation of each scrip in the Index during the base period. The market cap during the base period is equated to an Index value of 1000 known as the base Index value.

Total Return Index Calculation

The NIFTY 50 reflects the return one would get if an investment is made in the index portfolio. As the NIFTY 50 is computed in real- time, it takes into account only the stock price movements. However, the price indices do not consider the return from dividend payments of index constituent stocks. Only the capital gains and losses due to price movement are measured by the price index. In order to get a true picture of returns, the dividends received from the index constituent stocks also need to be included in the index movement. Such an index, which includes the dividends received, is called the total return index. The total return index reflects the returns on the index from stock prices fluctuation plus dividend payments by constituent index stocks.

The total return version of the NIFTY 50 index is also available, which assumes that dividends are invested back into the index on the ex-date. Corporate actions like Dividend announcement do not require any adjustment in the normal price index (other than special dividend). A separate series of index i.e. Total Returns Index (TR) is calculated which shows the returns on Index portfolio, inclusive of dividends.