The Nifty Next 50 Index is a broad-market index that represents the companies ranked between 50 to 100 on the National Stock Exchange (NSE) in terms of market capitalization. The companies listed in this index are typically in their growth phases and could potentially become part of the Nifty 50 in the future.
NSE launched the Nifty Next 50 Index futures, which is on the Nifty Next 50 index in April this year. The NSE defines the characteristics of the futures contract, such as the market lot, underlying index, and the contract’s maturity date.
In this article, we will cover what it means for the Nifty Next 50 Index.
Key Components of Nifty Next 50 Derivatives
It is important to be aware of the characteristics of Nifty Next 50 derivatives before we move ahead to its impact on the index itself.
- Contract Size: The minimum lot size is Rs. 5 lakh for both F&O.
- Contract Availability: The trading cycle of this contract spans three consecutive months:
- Near-Month
- Mid-Month
- Far-Month
The trading day following the expiry of the near-month contract sees the introduction of a new contract.
- Expiration: The contracts expire on the last Friday of the expiry month. If last Friday is a holiday, they will expire on the preceding trading day.
- Strike Price: For Nifty Next 50 options, the NSE offers contracts at strike intervals of both 500 (for far-out-of-the-money options) and 100 ( for near-the-money, at-the-money, and in-the-money options).
- Option Type: They are European types and can only be exercised on the expiration date.
- Price: This derivative’s price band is set at ±10% of the base price. The price step for Nifty Next 50 futures contracts is Re.0.05.
- Settlement: These derivatives are cash-settled.
Impact of the Nifty Next 50 Derivatives on its Index
The introduction of derivatives for the Nifty Next 50 marks a significant expansion in the trading options available for investors interested in this segment of the market.
Derivatives, such as futures and options, allow traders to hedge, speculate, and leverage their positions, potentially increasing liquidity and interest in the Nifty Next 50 stocks.
Market Impact
As of March 2024, the Nifty Next 50 represents approximately 18% of the total market capitalization on the National Stock Exchange (NSE), with a daily turnover reaching ₹9,560 crore. The Nifty Next 50 share price is at Rs. 75,485.95 as of 5th September 2024.
Of this, cash market transactions account for about 12% of the total figure for the fiscal year 2024. The introduction of derivatives could amplify trading volumes as it attracts both retail and institutional investors seeking to capitalize on the index’s growth prospects.
Trader’s Sentiment
The availability of derivatives might also alter trader sentiment towards the Nifty Next 50.
With tools to hedge against potential downturns, traders might be more willing to trade in the stocks of these companies, perceiving reduced risks associated with hedging their positions.
Price Discovery
Derivatives play a critical role in the price discovery process, helping to reflect future expectations of market movements more accurately.
This can contribute to a more efficient market where prices better reflect the underlying economic and financial realities of the Nifty Next 50 companies.
Conclusion
The launch of Nifty Next 50 derivatives brings exciting new opportunities for traders. These tools make it easier to manage risks and invest in emerging leaders of the market.
