Nifty IT Index: The stock market is a whole new thing for many people. There are many parties, companies and intermediaries involved in it. Many events affect the market’s sentiments, every single second and the stock prices keep changing.
Suppose, we have to find out how is the market moving on a particular day. We’ll have to look at the data of at least 5,000 companies listed on the exchanges. Now, that would be a herculean task!
But we have indices to the rescue. In this article, we shall understand the concept of indices and delve deeper into the Nifty IT index.
Table of Contents
What companies make up the The Nifty IT Index? – Constituents of Nifty IT Index
Here is a list of the constituents of the Nifty IT Index and their weightage. And, if you want to know more, please feel free to read on. Company NameWeightageSymbolISIN Code Infosys Ltd.27.35INFYINE009A01021 Tata Consultancy Services Ltd.26.42TCSINE467B01029 HCL Technologies Ltd.8.40HCLTECHINE860A01027 Wipro Ltd.8.29WIPROINE075A01022 Tech Mahindra Ltd.8.27TECHMINE669C01036 Larsen & Toubro Infotech Ltd.5.37LTIINE214T01019 MphasiS Ltd.5.34MPHASISINE356A01018 MindTree Ltd.5.29MINDTREEINE018I01017 L&T Technology Services Ltd.2.68LTTSINE010V01017 Coforge Ltd.2.60COFORGEINE591G01017
What Are Indices?
The Bombay Stock Exchange (BSE) has over 5000 companies listed on it. On the other hand, the National Stock Exchange has over 2000 companies listed on it. We would have to go through the data related to all of these companies and find out why their stock prices have gone up or down. All this, just to know the market movement.
However, checking a few important companies across key sectors would do the job. When most of these companies are moving up, the markets are up. If a majority of them are down, the markets are down. The markets are sideways when there is a mixed trend. Essentially, a few companies can represent the broader markets and help us know the general market movement.
Let’s get to it – The Meaning of an Index
Some of us like to focus on important work. Even if we have to study a few companies and track them, it takes too much of our time.
Indices (Singular: Index) compile the performance of important companies in various sectors or the broader markets to give us this information. You must have heard people saying, “The Sensex is 1000 points up today.” The points, this is what we’re talking about.
Ideally, indices give us minute by minute readings about how market participants perceive the markets. They reflect the changing expectations and give us a sneak peek into what could happen in the future.
What Is The Nifty IT Index?
The Nifty IT Index is a sectoral market indicator that captures the performance of IT companies. It comprises 10 companies as seen in the table above.
The Information Technology (IT) industry has played a major role in the Indian economy. This includes companies engaged in software development, hardware, IT infrastructure, education and more.
The Nifty IT Index provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market in India.
The base date for computing the index using the free-float market capitalization method is 1st January 1996, and its base value is 1000. The base value was revised from 1000 to 100 with effect from 28th May 2004. It is reviewed on a semi-annual basis, every March and September.
What Can The Nifty IT Index Be Used For?
Now that we know what the Nifty IT Index is about, it’s important to know what we can use it for.
Just like other indices, the Nifty IT Index reflects the general market trend or movement. For example, the Nifty IT Index was at 31,650 points on 19th April 2022. On 22nd April, the index was at 32,426 points. This means that during this time period, the stock prices of top IT companies have gone up. This indicates that the market participants are optimistic about the future. On the other hand, when there is a drop, it indicates that the market participants are not too enthusiastic or are pessimistic.
The Nifty IT Index is used as a yardstick to measure the performance of one’s investment in IT companies.
For example, say that you have invested ₹ 1,00, 000 in the shares of an IT company. After a year, the value of your holdings is ₹ 1,25,000. You might think that your investment has done well since you have received a return of 25% on your investment. However, the Nifty IT index moved from say 20000 points to 26000 points. This means that it increased by 30%. This helps you to understand that the stock that you had invested in has underperformed the market.
Trading and Hedging
Many investors trade on indices through ‘derivatives’. They can do so with the Nifty It index as well.
It can be used for hedging risks. Hedging is a strategy that is used to offset losses in investments by taking an opposite position in a related asset. For example, if investors invest in a share for the long term, sure, their prices can go up. However, they might go down as well and erode their capital. The Nifty IT Index can be used to hedge the portfolio.
Many index funds and Exchange-traded funds (ETFs) are based on the Nifty IT Index.
However, these are topics that we’d like to share more about, so we’ll explore them in other posts.
The Construction Methodology Of The NIFTY IT Index
The Nifty IT Index is composed of many stocks from the IT Sector. But, the question is that what makes a stock eligible to be a part of the Nifty IT Index?
The index is reviewed periodically. When that happens, the company should be a part of the Nifty 500 index.
The obvious, the company should form a part of the IT Sector.
They must be listed on the National Stock Exchange (NSE).
The company’s trading frequency in the last six months should be at least 90%.
It should have a listing history of at least six months.
If a company comes out with an IPO, then it should fulfil the normal eligibility criteria for three months instead of six months.
Companies that are available for trading on the NSE’s Futures & Options segment at the time of final selection get preference.
No single stock shall be more than 33% in weightage. The weightage of the top 3 stocks cumulatively shall not be more than 62% at the time of rebalancing.
How Did The Nifty IT Index Perform?
The Nifty IT Index has delivered 25.16% returns since its inception in 1996. It has given price returns of 27.68% in the last five years and 40.46% in the last year. Index Returns (%)QTDYTD1 Year5 YearsSince Inception Price Return-6.16-6.1640.4627.6825.16 Total return-6.02-6.0242.9630.23
There are many sectoral indices. Out of these, the only indices that did better than the Nifty IT Index in terms of returns are the Nifty Energy Index, Nifty Media and Nifty Metal.
Key Takeaways From This Article
In this article, we understood that the Nifty It Index acts as a barometer for the performance of IT companies in India. When it goes up, IT companies are doing well and vice versa. We get information from the index, and use it for benchmarking, trading and hedging. The NSE follows the free-float market capitalization method to construct indices, including the Nifty IT Index.
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