WHAT IS FINNIFTY IN STOCK MARKET ?
stock markets, investors often come across various terms that may sound unfamiliar at first. One such term is “Finnifty.” In this article, we will delve into the details of what Finnifty is, its significance, and how it operates in the stock market. Whether you are a seasoned trader or a beginner in the financial world, understanding Finnifty can be crucial for making informed investment decisions.
Finnifty is a blend of two words: “F&O” (Futures and Options) and “Nifty.” It refers to the stock market index that represents the performance of the Nifty 50 companies in the Futures and Options (F&O) segment. The Nifty 50 is a renowned index that comprises 50 large-cap stocks across various sectors, and Finnifty is designed to track the movement of these Nifty stocks specifically in the F&O segment.
A stock market index is created by selecting certain stocks of similar companies or those that meet a set of pre-determined criteria. These shares are already listed and traded on the stock exchanges. Performance of the stock market is proportional to the performance of the underlying stocks and that makes up the index. So if the prices of the stocks goes up the index also goes up. So what are the types of Stock Market Indices?
- S &P BSE SENSEX
- CNX NIFTY (NIFTY 50)
Let us understand what each index mean
S & P BSSE SENSEX
It is a free float market weighted stock market index of 30 well established and also financially sound companies listed on Bombay Stock Exchange. It was published on 1st January 1986, the S & P BSE SENSEX is considered as the pulse of domestic stock markets in India. The base value of the SENSEX was taken as 100 on 1st April 1979 and its base year as 1978-79. It was on 25th July 2001 BSE launched DOLLEX-30, a dollar linked version of the SENSEX.
CNX NIFTY (NIFTY 50)
The CNX Nifty is a flagship index on the National Stock Exchange of India Ltd (NSE). The index tracks the behavior of a portfolio of blue chip companies, the largest and most liquid Indian Securities. It includes 50 of the approximately 1600 companies listed on the NSE captures 65% of its float adjusted market capitalization and is a correct reflection of Indian Stock Market. It covers the major sectors of the Indian Economy and offers investment manager’s exposure to the Indian Market.
In January 2021, the National Stock Exchange (NSE) launched Nifty Financial Services which is called as FINNIFTY. This includes financial institutions like banks, insurance companies, housing finance and other companies who offer financial services. This index includes certain number of stocks in different weights.
THE PURPOSE OF FINNIFTY
The main purpose of Finnifty is to provide investors with a clear picture of the overall sentiment and direction of the Nifty 50 stocks specifically in the F&O market. As derivatives instruments, Futures and Options play a significant role in hedging and speculation. Therefore, Finnifty becomes an essential tool for traders and investors engaged in derivative trading.
HOW FINNIFTY WORK ?
Finnifty operates based on the principles of index construction and calculation. The index is calculated using a free-float market capitalization-weighted methodology, where the weightage of each stock is determined by its market capitalization and the available free-float shares. This method ensures that companies with larger market capitalization have a more substantial impact on the index’s movements.
FUTURES AND OPTIONS IN FINNIFTY
Futures contracts and options contracts based on Finnifty allow market participants to trade and speculate on the future direction of the Nifty 50 stocks. Traders can take long (buy) or short (sell) positions in Finnifty derivatives, offering them the potential to profit from both upward and downward market movements.
WHAT IS NIFTY FINANCIAL SERVICES INDEX?
The Nifty Financial Services Index commonly known as FINNIFTY tracks performance of Indian Financial Services. It includes index of 20 stocks and stock weights are based on free float market capitalization. Its base value is 1000.
Free Float Market Capitalization = Shares outstanding * Price * IWF
IWF= Investible Weight Factors
A higher IWF is indicative of more shares under public shareholding listed. Financial entities are very crucial for the success and survival of the economy especially in countries like India where the economy is continuously undergoing changes. Banks lend to borrowers from the surplus savings. FINNIFTY basically aims to reflect the behavior of the above. mentioned sectors and sub sectors in the economy. So in short it can be said that FINNIFTY is the symbol of Nifty Financial Services. In order to be included in FINNIFTY companies should be included in NIFTY 500. The weight of each stock is based on free float market capitalization factor.
FINNIFTY INDEX COMPOSITION
The Finnifty index constituents are the same as the Nifty 50 index constituents. Some of the prominent companies included in the Finnifty index are Tata Consultancy Services (TCS), Reliance Industries, HDFC Bank, Infosys, and Hindustan Unilever, among others.
LIST OF FINNIFTY STOCKS ALONG WITH WEIGHTAGE
|SR.NO||NIFTY FIN SERVICE||INDEX WEIGHT|
|1||HDFC BANK LTD||24.27%|
|2||ICICI BANK LTD||19.54%|
|3||HOUSING DEVLOPMENT FINANCE CORPORATIONS LTD||16.24%|
|4||AXIS BANK LTD||8.30%|
|5||KOTAK MAHINDRA BANK LTD||8.10%|
|6||STAE BANK OF INDIA||6.60%|
|7||BAJAJ FINANCE LTD||4.70%|
|8||BAJAJ FINSERV LTD||2.53%|
|9||HDFC LIFE INSURANCE COMPANY LTD||1.72%|
|10||SBI LIFE INSURANCE COMPANY LTD||1.62%|
|11||CHOLMANDALAM INVESTMENT AND FINANCE COMPANY||1.02%|
|12||SRIRAM FINANCE LTD||0.91%|
|13||ICICI LOMBARD GENERAL INSURANCE COMPANY LTD||0.88%|
|14||SBI CARDS AND PEYMENT SERVICE LTD||0.73%|
|15||HDFC ASSET MANAGEMENT COMPANY LTD||0.60%|
|16||POWER FINANCE CORPORATION LTD||0.54%|
|17||ICICI PRUDENTAIL LIFE INSURANCE COMPANY LTD||0.53%|
|19||INDIAN ENERGY EXCHANGE LTD||0.36%|
|20||MUTHOOT FINANCE LTD||0.35%|
HOW TO INVEST IN FINNIFTY STOCKS
The first step to invest in Fin Nifty stocks is to open Demat Account. Also before investing all necessary advice should be taken in to consideration. Investors cannot directly invest in the index. They can do through mutual funds schemes that has higher weightage and in order to buy FINNIFTY stocks the investor needs to buy the entire 20 stocks for which corresponding weights are mentioned.
WHY SHOULD ONE INVEST IN FINNIFTY
The primary advantage of investing in FINNIFTY is it brings down the non-systematic growth. Unsystematic risks include financial and business risks. Non systematic risk includes events such as strikes, rise in financial cost, and reduction in profit, drop in sales or even natural disasters. Diversification can reduce these risks to some extent.
ADVANTAGES OF FINNIFTY
Diversification: Finnifty offers diversification benefits as it includes 50 well-established companies from various sectors.
Hedging: Finnifty derivatives allow investors to hedge their positions and mitigate risks in the F&O market.
Speculation: Traders can use Finnifty to speculate on the short-term movements of the Nifty 50 stocks.
RISKS ASSOCIATED WITH FINNIFTY
Market Volatility: As with any index, Finnifty is subject to market volatility, which can lead to rapid price swings.
Leverage Risks: Trading in derivatives involves leverage, magnifying both profits and losses.
Economic Factors: Economic downturns and unfavourable events can impact Finnifty negatively.
FINNIFTY CONTRACT AND SETTLEMENT PROCESS
The Nifty Financial Services Index Derivatives are settled in cash with expiry day being the last Thursday of the expiry month for the monthly contracts and Thursday of the expiring week for weekly expiry contracts. NSE is offering futures and options in 7 serial weekly excluding the monthly expiry & 3 serial monthly contracts.
FIN NIFTY Index has performed well with its diversified exposure to various sectors in the economy. It has so far provided returns up to 18.64%. FINNIFTY Index has performed better on CAGR point to point basis. For any investor the key point to remember is portfolio diversification and research. Understanding the basics along with the experience and patience can bring good returns. So in short we can say that FIN NIFTY has been performing very well and many investors are nowadays investing in these stocks.
Finnifty is a crucial stock market index that tracks the performance of Nifty 50 stocks in the Futures and Options segment. It offers valuable insights into the sentiment of these stocks in the F&O market and serves as a tool for traders and investors in their derivative trading strategies. Understanding Finnifty dynamics, advantages, and risks can empower investors to make informed decisions in the ever-changing world of finance.
What is Finnifty historical performance?
Finnifty historical performance can be evaluated through various financial websites and market research reports. Past performance is not indicative of future results.
How often is Finnifty rebalanced?
Finnifty is typically rebalanced semi-annually, in line with changes in the Nifty 50 index.
Can Finnifty be traded by retail investors?
Yes, Finnifty derivatives are accessible to both retail and institutional investors.
Is Finnifty affected by foreign market movements?
While Finnifty is primarily influenced by domestic factors, significant global events can have an impact on it.
What are the tax implications of trading Finnifty derivatives?
Taxation on Finnifty trading depends on the individual’s tax jurisdiction and trading volume. It is advisable to consult a tax professional for specific guidance.