How Does NIFTY Work?

The Eastman Kodak Corporation is another such example. The company was once considered to be a top blue-chip company with high earnings potential and the name "Kodak" being a household name when it came to cameras.

Of course, besides these few failures, the Nifty 50 list of stocks did have some big names. Companies such as Coca-Cola, Walt Disney, Procter & Gamble are still some of the big large cap stocks and ones that are very popular among investors, decades later.

The above chart illustrates the stock price for the Coca-cola company since the 1970’s when it was part of the NYSE Nifty 50 index. You can see how the index has a composition of companies that continued to become a success story while there were also companies that eventually went bankrupt.

Coca-Cola, among a few other companies made to the list of the Terrific-24 which managed to outperform or was able to match the other benchmark market indexes such as the Dow or the S&P500.

The stocks in the Nifty 50 index also played a major role in the subsequent returns that they offered. In the bull market period, the Nifty 50 stocks continued to trade with high price earnings ratios. Some of the stocks were 50 or 60 times their earnings.

It should be mentioned that during the period in the 70's growth rate among publicly traded stocks were quite higher compared to the current earnings. The Nifty 50 index showed at one point that holding stocks with high potential will eventually deliver big returns provided they are held for a long period of time.

The returns could of course be magnified even further, if investors continued adding most of the Nifty 50 stocks to their portfolio, especially during times when the valuations of the companies dropped.

In a way, the Nifty 50 index stocks did eventually end up justifying their respective higher valuations. Despite the setbacks such as some of the companies going bankrupt, the Nifty 50 index did have its share of success.

In conclusion, the Nifty 50 index might not be in use today, but it does give some very good investing lessons. For investors who are just starting out, it pays to take some time to understand the history and the story behind the Nifty 50 index, especially when it comes to factors such as risk, growth and timing of the stocks.

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.

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.

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.

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.

This in turn became a self-fulfilling prophecy as new investors continued to buy the stocks, even at the highs and pushed the prices higher. Clearly, there was a bubble forming in the Nifty 50 basket of stocks that was clearly overlooked.

Investors viewed the Nifty 50 as a "one decision" pick as they had the lure of being a bunch of stocks ideal for "buy and hold."

The NYSE Nifty 50 stocks were considered to be the main drivers in the U.S. equity markets at the time. They are also directly attributed to propelling the bull markets in the early 1970's.

When one talks about Nifty 50, it is easy to get confused. This is because besides the Nifty 50 on the NYSE, there is also another index with the same name. Known as the NSE Nifty 50, this index belongs to the Indian stock markets.

The ticker symbol for the NSE’s Nifty 50 index is NSE: NIFTY. Below is a chart of the NSE's Nifty 50 index. This is still in use to this day. The index is ideally used for derivatives trading.

The National Stock Exchange (NSE) Nifty 50 also has a similar make up in the index. It comprises of top blue chip stocks spread across 12 sectors. The Nifty 50 is often used by Indian stock traders as a benchmark portfolio, similar to how the S&P500 is used in the U.S. equity markets.

As the name suggests, the NSE's Nifty 50 reflects the returns an investor would get if they invested in the selected stocks in the index. In a way, the NSE's Nifty 50 index is also similar to that of the NYSE Nifty 50 index which was considered to be a "one decision" pick.

There are also other names including the Nifty Next 50, Nifty 200 index and so on. Therefore, when referring to the Nifty 50 index, it is best to use the terminology, NYSE Nifty 50 or the NSE Nifty 50 to differentiate between the two.

Below are some of the stocks that are listed in the Nifty 50 NYSE index. Interestingly though, there was no “publicly available” list of the Nifty 50 index, as compared to the Dow Jones 30 index for example.

During the stock market boom cycle in the 1970's, investors wanted to have a pick of an index that could give them the best market returns. The Nifty 50 was formed on such basis and as noted earlier, the stocks needed to have high price/earnings.