An index is constructed by selecting a set of stocks using published rules and combining their prices into one number, with each stock's influence decided by its weight. Most major Indian indices, including the Nifty 50 and Sensex, weight stocks by free-float market capitalisation, so bigger, more freely traded companies move the index more.
If you haven't yet read what is a market index like the Nifty 50 or Sensex?, start there.
Who decides which stocks get in?
Every index has an index provider (typically a company connected to the exchange) that publishes the rulebook. The rules usually cover things like:
- how long the stock has been listed and how frequently it trades (liquidity),
- how large the company is by free-float market capitalisation,
- whether it belongs to the segment the index represents (a bank index only admits banks).
The exact cut-offs are set by each index provider and differ from index to index, so always check the provider's methodology document for the index you care about. The provider also reviews the list periodically and swaps stocks in and out. That process is covered in what is index rebalancing, and why do stocks move on it?
How does free-float weighting actually work?
Free float is the portion of a company's shares available for the public to trade, if that's new to you, read what is free float, and why does it matter? first.
Imagine a tiny index with three fictional companies. Anjali wants to know how much say each one gets.
| Company | Market cap | Free float | Free-float market cap | Weight |
|---|---|---|---|---|
| Kaveri Motors | ₹20,000 crore | 60% | ₹12,000 crore | 60% |
| Bharat Paints Ltd | ₹10,000 crore | 50% | ₹5,000 crore | 25% |
| Sundar Textiles | ₹6,000 crore | 50% | ₹3,000 crore | 15% |
Add up the free-float market caps: ₹12,000 + ₹5,000 + ₹3,000 = ₹20,000 crore. Each company's weight is its share of that total. Kaveri Motors carries 60% of the index even though it is only one of three stocks, because most of its large market cap is freely traded.
Notice what free float changes: Bharat Paints and Sundar Textiles could have promoters holding very different stakes, and the index would count only the publicly tradeable slice. A huge company whose promoters hold 90% of the shares gets far less weight than its headline market cap suggests.
Why do big stocks move the index more?
Because the index is a weighted average, a stock's daily move affects the index in proportion to its weight.
Say Kaveri Motors rises 1% today while the other two stocks stay flat. Anjali's three-stock index rises by 1% × 60% = 0.6%. If Sundar Textiles rose 1% instead, the index would move only 0.15%. That's why, on real trading days, a handful of heavyweight stocks can drag the Nifty 50 up or down even when most of the other constituents barely moved.
This also means an index is not a simple "average mood" of all its stocks. A day when 35 of 50 stocks fall can still end with the index green, if the few heavyweights rallied.
Are all indices weighted this way?
No. Free-float market-cap weighting is the most common method in India, but providers also build equal-weight indices (every stock gets the same weight) and other rule-based variants. Same stocks, different weighting rule, noticeably different index behaviour. An equal-weight version gives small constituents much more say.
Things to keep in mind
- Index weights change every day as prices move; the published weights you see are a snapshot, not a fixed allocation.
- Eligibility criteria, review timing and cut-offs are set by each index provider and can change. Read the methodology document for the specific index rather than assuming.
- A heavyweight stock's bad day can pull the index down even when most constituents rise, so the index level alone doesn't tell you how broad a move was.
- Watching an index is easy on Rupeezy. See how do I add Nifty 50, Sensex or other indices to my watchlist?
Read next
What are the Nifty Next 50, midcap and smallcap indices? — Beyond the headline index, the ones covering the rest of the market.