If you put some effort understanding the Nifty and the Nifty Future, we have for you another set of the underlying index and its derivative contract. For a newbie, this might seem like it’s getting too complicated and confusing. Well do not worry, read on and your confusion will be cleared by the end of this article.
We will tell you all you need to know about the Bank Nifty and its derivative the Bank Nifty Future.
Along with the main market index Nifty 50, there are other sector related indices which help in tracking a particular sector or industry. One such important index is the Bank Nifty Index which tracks the economic performance of the Indian banking sector. This sector is considered as the backbone of any economy and is closely watched to analyze the overall economic health of a country.
The Bank Nifty Index includes 12 largest and the best banks listed on the stock exchange. Both private and public sector banks form a part of this index.
According to the NSE, the Bank Nifty Index represents 92.2% of the total free float market cap of the stocks in the banking sector and 16.35% of the free float market capitalization of all the stocks listed on the NSE as of 31 Mar 2015.
In terms of value, the Bank Nifty Index represents 82.68% of all the stocks traded in the banking sector and 12.91% of the value of all the stocks traded which are listed on the NSE. This shows the importance of this index and its vast representation.
According to the NSE, the banks in the Bank Nifty should have a free float market cap and turnover rank of less than 500 in the Universe. They should have a minimum trading frequency of 90% in the last six months and a positive networth. A new bank which comes out with an IPO and fulfills all the above-mentioned criteria can be included in the index within 3 months instead of the normal 6-month period.
The Bank Nifty Future is the derivative of the Bank Nifty Index and is the second most heavily traded index future. The Bank Nifty future started trading on Jun 13 2005.
The Bank Nifty Future trades with a lot size of 30 currently (Nov 2015). All quantities are traded in multiples of 30. The contract is settled on the last Thursday of every month similar to all other derivative contracts. Three contracts are open on any given day. The most liquid contracts are the near month contracts. The next month and the far month contracts are relatively illiquid. The settlement price of the Bank Nifty Future coincides with the Bank Nifty Index spot price on expiry day.
As the value of the Bank Nifty Index is much higher than the Nifty 50, the premium and discount on it are also much higher depending on the bullishness and bearishness of the markets. Similar to the Nifty, a trader can trade in the Bank Nifty Future by depositing certain margin money fixed by the exchange and his broker. The total required margin money is much less than the total value of the contract.
The Nifty index captures the mood of the overall market, however if a trader is bullish or bearish on the banking sector in particular due to reforms or other news, trading in the Bank Nifty Future will award the trader the maximum benefit. With positive news in the banking sector, the Bank Nifty outperforms the index and vice versa.
|Trading derivative||Bank Nifty Future|
|Expiry||Last Thursday of every month|
|No of Contracts||Three, near month, next month and far month|
|Lot Size||30 (as on Nov 2015)|
For a seasoned trader who is watching the economy closely, the Bank Nifty Index offers large opportunities to benefit. As it is a sector-specific index, it needs specific studies and monitoring because only a few large stocks in the sector can move the whole index up or down. But for new traders, it is advised that they enter into trading the Bank Nifty Futures only after a few months of successful trading the main Nifty Future Index.