In February 2017, a news of BHEL and Idea being removed from the Nifty50 must have caught your eyes. If u have been in the stock market or following it for a while you must have heard of such news of stocks getting added to or removed from or replaced by others in the Nifty 50 quite a number of times.

Ever wondered what this means? Let us try to understand the implications of addition or deletion of stocks from Nifty 50. But before we go into the details let us try to understand what Nifty 50 is.

Nifty 50 is ……

The NIFTY 50 index is an index of 50 stocks which are believed to be the broad representatives of the market. NIFTY is National Stock Exchange (NSE) of India’s benchmark index for Indian equity market comprising of 50 stocks belonging to 23 diverse sectors. It is widely followed by stock market investors. Following is the list of stocks comprising NIFTY 50

Since it is tracked by both analysts and investors across the globe, it is a big deal for stocks to be part of the “elite” group.

When a stock is added or deleted from the index

What happens to the index?

Nothing. It remains constant. It always comprises of 50 companies. The stock deleted is replaced by another while the stock added replaces the one that is deleted. An interesting fact though is that the Nifty actually comprises of 51 stocks despite number of companies being 50. Why so? Because Tata Motors stock appears twice – once as ordinary stock and once as DVR (differential voting rights) 

What happens to the stock?

A stock that is being added to the index gets positive investors reaction as such inclusion is taken to be a sign of better future prospects and good quality of the stock and also ETFS and other investors start buying the stock to track the index pushing the price up(You can track index through SAS Online Website). Its price usually heads north once the news of its inclusion is out. The stock on removal from the “elite” group attracts negative investor sentiment and the stock price can see some corrections.

But that’s not a hard and fast rule. In February 2016, the Nifty underwent reshuffling to replace. Cairn India, Punjab National Bank and Vedanta by Aurobindo Pharma, Bharti Infratel, Eicher Motors and Tata Motors (DVR). But while prices of all 3 stocks excluded rose significantly since exclusion, prices of the ones included have only moved at a pace that can only be christened assnail’s pace in comparison.

Many stocks see inclusion and exclusion multiple times. A classic example is Dr Reddy’s stock that underwent inclusion thrice and deletion twice from the NIFTY 50. It was part of the original composition of the index and then got deleted in 1997, added back in 1999, dropped again in 2008 with the latest inclusion coming in 2010. Ever since it has remained part of the index.
But why are stocks removed from the index?

There are two main reasons

1. Prolonged underperformance leading to depletion in market capitalization
2. Corporate actions such as demerger, scheme of amalgamation etc such as removal of IDFC due to demerger of IDFC Bank in 2015

To conclude, it can be said that through exclusion and inclusion from the index have an impact on stock prices they do not guarantee the performance or underperformance of stocks.

“However, volatility and movement are almost always observed in that stock, making it a good opportunity for traders”.