Bank Nifty is the stock market index tracking the performance of India’s banking sector. The bank nifty was created in 2003 by the National Stock Exchange to offer a barrier-free movement of the capital market performance of the banking sector of India. The index includes 12 private sector and state-owned banks. Similar to Nifty, the investors bullish on banks can purchase the bank Nifty futures, including 15 shares or purchase any call option on the bank Nifty. Similarly, bears can buy any put option or bank Nifty futures on the index. However, the bank nifty is quite volatile compared to Nifty futures contracts.
Traders holding bank shares on an online trading app get to hedge themselves by availing contra positions on particular bands under the derivatives segment.
What Sectors Are Included In The Nifty?
To learn the importance of Bank Nifty, it is important to understand the wider context of the benchmark indices of India. निफ्टी 50 tracks the performance of the 50 significant equity stocks that trade on the National Stock Exchange.
These 50 stocks showcase a wide cross-section of the economy of India, expanding across multiple sectors, including:
- Financial services
- Information technology
- Metals
- Consumer goods
- Media & entertainment
- Telecommunications
- Pharmaceuticals
- Automobiles
- Cement and its products
- Fertilisers and pesticides
Hence, the Nifty offers a diverse view of the financial health of India.
Stock Selection Criteria: Nifty Bank
Acknowledging the nifty bank stock selection criteria lets you receive insight into the way the index is maintained and structured. Given below is a breakdown of the selection criteria applied for the selection of Nifty Bank:
- Market capitalization
The stock market capitalisation plays an essential role in representing its inclusion in the Nifty Bank index, as it is the direct measure of the influence and size of a company in the particular industry. Hence, to be counted in the index, the stock must have a market capitalisation that is large enough to showcase a representative banking industry segment.
- Liquidity of the stock
A stock should have enough liquidity in regard to trading volumes to be considered in the Nifty Bank Index. Usually, high liquidity is preferred as it comes with efficient price discovery. Hence, the supply and demand dynamics are represented accurately in the price of the stock. Liquidity stands as a primary criterion for the bank index as it represents that the index is always relevant and responsive to market changes.
- Sector representation
The Nifty Bank index offers a comprehensive, accurate overview of the Indian banking sector. The criteria of selection for the index focus on showcasing the diversity by acknowledging the representation of both private and public sector banks, along with other financial institutions. Thus, diversity ensures that the index represents the correct overall performance and health of the Indian banking sector.
- Financial performance
Significant importance is given to the financial performance of different companies to ensure the inclusion of only the companies with stable performance in the banking sector. The index consists of companies that hold an attractive record of good financial health and consistent profitability.
Conclusion:
The bank nifty is considered a benchmark for mutual fund managers and investors to monitor the way banking stocks might perform in general, and whether particular funds are capable of generating profits. Additionally, traders can also utilise bank Nifty futures contracts to hedge their present positions in bank shares or monitor future price movements. Hence, the bank Nifty is quite volatile as compared to the Nifty futures contract because of its minor focus on banking stocks. As the bank nifty is well known for its high volatility, investors placing orders via a trading account must exercise caution when dealing with the same. The value of investments might fluctuate, and it is essential to carefully manage risk.