How to trade the Nifty Bank?

Nifty Bank is an index composed of 12 banking stocks that has the highest market cap and most liquid. This means the index tracks the performance of the banking industry.

Market participants in India and abroad prefer to call it Bank NIFTY.

NIFTY Bank Index is computed using free float market capitalization method. It’s used for a variety of purposes such as benchmarking fund portfolios, launching of index funds, ETFs and Structured products.

Launch Date is September 15, 2003.

Bank NIFTY Index Constituent

Here is the list of 12 banking stocks that is forming part of NIFTY bank index;

Top constituents by weightage

Note: weightage shown above may change based on how these underlying security’s performance.

How to trade the Nifty Bank?

You can not buy the index from the cash market as these are made up of multiple stocks.

One of the ways to trade nifty banks is by buying one or more units of Exchange Traded Funds (ETF) based on Bank Nifty.

ETFs are like mutual funds in which the fund house collects money from individual investors and invests it together into those stocks that are part of Bank Nifty in proportion to their weightage.

This means the fund house will copy the composition of NIFTY Bank by investing in the underlying stocks to get a return that exactly or approximately matches to the rate of return of NIFTY Banks.

In India, these ETFs are not highly liquid to trade. Therefore two more options are available in NSE.

They are derivatives such as Options and Futures. It is now heavily traded on the stock market.

Future and option contracts use the NIFTY Bank as an underlying asset.

These options and futures let you take exposure to the Nifty Banks. This means, the price movement of the derivatives is linked to that of the index (NIFTY Bank). Based on the performance of the Bank Nifty, these contracts are heavily traded in stock exchanges.

As the index is not a stock, you can not take delivery of the same on the expiry date of these derivative contracts. Therefore, all the index derivatives are cash-settled on the date of expiry. In India, index derivative contracts have weekly expiry, which expire every Thursday.

You can have a look at the option chain maintained by NSE to know how many contacts are traded, the expiry date, and the premium to be paid for buying and selling those contracts.

Here is how traders trade NIFTY Bank;

• If they have a bearish view, they short-sell the Nifty future contract. Instead, if they have a bullish view, they purchase Nifty future contracts.
• Instead of future contracts, in case of a bullish view, they buy Nifty Bank Call options. If the trader has a bearish view, expecting the market to fall, then they purchase the put options contract of the NIFTY Bank. Based on their strategy they can buy and sell At-The-Money (ATM), Out-Of-The-Money (OTM) and In-the-Money (ITM) call and put option contracts.

Traders can even short sell the call and put option contracts based on their view on the stock market.

Please note, derivatives are significantly riskier to trade and require experience to actively monitor the performance.

Novice traders are suggested to acquire enough knowledge and experience before getting into trading in the derivative segment.

One of the best ways for retail investors to invest in NIFTY Bank is through mutual funds. Many mutual funds have created index funds which feature the same portfolio of stocks that feature in NIFTY Bank. The main purpose is to earn exactly the same return that underlying stocks of NIFTY Bank earns each year.