Why nifty may never cross 15000?

Before I discuss why nifty may not be able to cross 15000

let me assure you that even if nifty doesn't cross 15000 it won't matter much and it won't be such a bad thing!

But first, let us see how nifty is calculated.

Nifty comprises of 50 stocks.

Top 50 by way of 'highest free float market capitalisation' are selected.

Let us understand this.

Suppose a company A has 1 lac shares, and the current market price of each is Rs.500/-

So, the total market capitalisation of this company is 500/- x 1 lac = 500 lacs

But this is not the free float market capitalisation. This is total market capitalisation.

This is so because all 1 lac shares are not available for trade in the market.

Some of these are with the promoters besides soome locked with government etc.

Lets assume that there are 30,000 such "holy" shares.

This reduces the number of shares freely available for trade in the open market as 1 lac minus 30,000 = 70,000

So, now the free float market capitalisation of company A is 500/- x 70,000 = 350 lacs (not 500 lacs as earlier)

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Now, calculate the free float market capitalisation of all companies

and shortlist the top 50.

Add the free-float market capitalisation figures of all of these 50 companies.

Let's assume this figure comes as F.

We are just one step of calculating.

Let's see how....

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Nifty was launched in 1995 with base value 1000.

Does this mean that the market capitalisation of nifty 50 shares in 1995 was 1000.

Not really.

It might have been 10000 crore or so.

But how would it have sounded if someone were to say that nifty today is 1213 crore!!!???

It would sound ridiculous.

Certainly not an indicator.

So, someone must have given the idea of taking 1200 crore as 1000.

This is known as the base value.

So, what will be the nifty value if market capitalisation was 2400 crore?

Simple, 2000! (Because 1200 crore was taken as 1000).

Similarly, what will be the nifty value if market capitalisation was 3600 crore?

Simple, 3000!

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So, now can you convert the sum total of freefloat marketcap of 50 companies into today's nifty value?

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Now, we come to our main question

why nifty may not cross 1500 ever?

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Would you be surprised if I told you that the list of 50 companies in the nifty fifty list keeps on changing?

Yes, it is true as most of us know that!

If the share price of a company in the index keeps falling, its market capitalisation also keeps slipping.

Finally it is no more in the top 50.

is given a silent good-bye from the nifty fifty

and is replaced by a new upcoming midcap-turned-large-cap blue eyed company!

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Now, you will not be surprised that majority of the nifty fifty companies of 1995 are out of the present list!!!

Why?

They stopped growing (that fast)

and hence their share price and market capitalisation stagnated or dropped!

Others overtook them!

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Every company in the nifty fifty has a limit of growth!

Every company grows old and must die (or atleast fade away respectfully), sooner or later.

Nifty value will keep rising only till India is a developed country

Even inflation will die down thereafter!

Thereafter, it will keep oscillating in a range.

But it will never be the same.

Old companies will keep making way for new companies in the top 50!

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Want proof?

Look at Nasdaq.

It was near 2500 in 1999.

It is near 2100 in 2010 !!!

But the size of economy has increased manyfold!!!

It is the middle or the bottom of the corporate pyramid that is fattening!

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So, 15000 or 20000 or whatever!

Nifty's growth hormones will subside even as the economy will keep growing

But investing opportunities in stocks

and trading opportunities in both nifty as well as stocks will always be there!