How Does NIFTY Work?

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An index comprising 12 state-owned and private sector banks. Like the Nifty, those bullish on banks can buy Bank Nifty futures comprising 30 shares, or buy a call option on Bank Nifty.

Assume you went long Bank Nifty futures at 16743 by paying a margin of 7% (Rs 35,160). If, on Monday, the Bank Nifty closes at 16500, the loss will be Rs 7,290 (243x30).

By putting a stop loss while directing the dealer to execute the trade. Say going long at 16743, if the trader put a stop loss at 16643, the loss would be restricted to Rs 3,000 instead of at Rs 7,290.

Yes, losses can be minimised by buying calls or puts for May expiry on Bank Nifty. Then the maximum loss will be limited to the premium paid to the seller for the call or put option. For instance, the most active 17000 call option was priced around Rs 151 at Friday closing.

A bull who buys the call would have had to pay a premium of Rs 4,530 — that’s the max he could lose. Similarly, a bear could buy the 16500 put by paying Rs 4980. In options, profit’s unlimited while loss is limited to the premium paid. In futures, a trader can have unlimited profits or unlimited losses, if stop loss is not placed.

Today, women are outpacing men in several areas. Surprisingly, investing is one area which still provides fertile ground for studying gender differences. On the face of it, this field should be gender agnostic as it does not involve physical exertion or spending long hours in office, both considered limitations for women. However, there are some differences in the manner in which the two genders approach investment.

NIFTY was coined fro the two words ‘National’ and ‘FIFTY’. The word fifty is used because; the index consists of 50 actively traded stocks from various sectors.

The apparent lack of interest in India is rooted in societal mores. The division of labour, wherein man provides and woman nurtures, is evident even in the most progressive urban households. Investing is seen as a male domain. Even when the woman earns a sizeable income, it is often agreed that her income will be used for household expenses and man’s for investments.

Besides, men are often not very forthcoming about investments. Any question posed by the spouse is viewed as an irritant and most women give up after some time. Even if a woman acquires knowledge, she does not take the next step of investing. This may be the reason some investment options are overwhelmingly dominated by men.

Let’s start with the story of John, a fruit juice vendor. John earns his livelihood by selling fruit juice at a busy street of town. He has a small truck where he keeps stock of fruits and has installed a hand-operated juicer.

The method adopted for calculating Nifty is the market capitalization weighted method in which weights are assigned according to the size of the company. Larger the size, higher the weight-age. The stocks in Nifty are selected based on a lot of qualitative and quantitative criteria.

Every morning he procures fruits from a wholesale shop and gets it to this truck. He manages to sell approximately 100 glasses of juice every day, priced at 20 Rs. per glass.

Thus his total revenue comes to 2000 Rs. per day or 60000 Rs. per month. His total expense comes around 40000 Rs per month towards procuring fruits, paying rent for the truck and space etc.

Post periodic review by India Index Services and Products (IISL), the National Stock Exchange's (NSE) will move ACC, Bank of Baroda, Tata Power and Tata Motors DVR from its benchmark Nifty 50 index.

Nifty, which is owned and managed by India Index Services and Products (IISL), is a diversified 50 stock index, which denotes the ups and downs of the 12 major sectors of the Indian economy.

Thus John effectively earns 20000 Rs per month through this small business.

n the 1960's and 70's, when the U.S. stock markets were still at the nascent stages, an index of 50 large cap stocks was created from the stocks trading on the New York Stock Exchange (NYSE). This group of 50 stocks was called the Nifty 50.

John envisions good future prospects in this business and plans to expand it by renting a shop and purchasing an electronic Juice machine.

There was no official list of the Nifty 50 stocks, and the basket of stocks eventually fell apart in the bear market that followed in the years after 1970’s.

Also, he would employ a person to help him during wee hours of day. The challenge is that he doesn’t have enough capital to materialize his plans.

The stocks, besides being large cap were also some of the most popular names of the time. They were also highly recommended by institutional investors for a long term buy and hold. Some of the companies that were listed on the Nifty 50 included household names such as Walt Disney, Coca-Cola and Dow Chemicals to name a few.

So he contacts few of his friends and relatives to invest in his business. He explains them the business model and his future plans to expand the business. Luckily he manages to convince two of his friends to raise capital.

One of the main differentiating factors with the Nifty 50 was that almost all of the stocks listed on the index had consistent earnings potential and came with a high Price/Earnings (PE) ratio. It is said that another reason for the number “50” in the NIFTY 50 index was due to the fact that all the fifty stocks listed had a P/E ratio of 50 or more.

As a comparison, at the time, the S&P500 index was trading at 19 times the earnings, compared to the Nifty 50 stocks which were at least two or three times more than the S&P500’s earnings. The high valuations were no doubt a magnet drawing investors.