What is FINNIFTY & How its Works?

FINNIFTY, also known as the Nifty Financial Services Index, is a benchmark index for the Indian financial services sector. It comprises 20 companies listed on the National Stock Exchange of India (NSE) that represent various sub-sectors such as banking, insurance, non-banking financial companies (NBFCs), and other financial services.

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The index was launched on January 1, 2019, and is designed to provide investors with a benchmark for tracking the performance of the financial services sector in India. The index is calculated using free-float market capitalization weighted methodology, which means that the weightage of each stock in the index is based on its free-float market capitalization, i.e., the total value of shares outstanding that are available for trading in the market.

The companies included in FINNIFTY are selected based on their market capitalization, liquidity, and trading volume. The index is reviewed semi-annually, in January and July, and any changes in the index constituents are made based on predefined eligibility criteria.

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The performance of FINNIFTY is closely watched by investors, traders, and analysts as it provides insights into the overall health of the financial services sector in India. The index is also used as a benchmark by mutual funds and exchange-traded funds (ETFs) that invest in the financial services sector.

To understand how FINNIFTY works, let's take an example. Suppose the index consists of three stocks with the following market capitalization and prices

Stock A: Market capitalization = Rs. 1,000 crore, Price = Rs. 100 per share

Stock B: Market capitalization = Rs. 2,000 crore, Price = Rs. 200 per share

Stock C: Market capitalization = Rs. 3,000 crore, Price = Rs. 150 per share

The total market capitalization of these three stocks is Rs. 6,000 crore. To calculate the weightage of each stock in the index, we need to divide its free-float market capitalization by the total market capitalization of all stocks in the index. The free-float market capitalization of each stock can be calculated by multiplying its market capitalization by the percentage of shares that are available for trading in the market.

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Suppose that Stock A has a free-float of 50%, Stock B has a free-float of 75%, and Stock C has a free-float of 90%. Then, the free-float market capitalization of each stock is calculated as follows:

Stock A: Free-float market capitalization = Rs. 500 crore (Rs. 1,000 crore * 50%)

Stock B: Free-float market capitalization = Rs. 1,500 crore (Rs. 2,000 crore * 75%)

Stock C: Free-float market capitalization = Rs. 2,700 crore (Rs. 3,000 crore * 90%)

The weightage of each stock in the index is then calculated by dividing its free-float market capitalization by the total market capitalization of all stocks in the index. In this case, the weightage of each stock in the index would be:

Stock A: Weightage = 8.33% (Rs. 500 crore / Rs. 6,000 crore * 100%)

Stock B: Weightage = 25.00% (Rs. 1,500 crore / Rs. 6,000 crore * 100%)

Stock C: Weightage = 45.00% (Rs. 2,700 crore / Rs. 6,000 crore * 100%)

The FINNIFTY index value is then calculated by multiplying the price of each stock by its weightage.

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