A stock market index (like Nifty or Sensex) is a group of selected stocks that represents the performance of the overall market or a specific segment of it.
Each stock in the index has a weight, which means some stocks impact the index more than others.
In India, most major indices like Nifty 50 and Sensex are weighted based on market capitalization—specifically free-float market cap.
What is Free-Float Market Capitalization?
It means only the shares that are available for public trading (not held by promoters or government) are considered.
Index Value=(Total Free-Float Market Cap of Index Stocks)/Index Divisor
Total Free-Float Market Cap of Index Stocks
The index divisor is a fixed number used to keep the index value consistent over time.
A. Example – Nifty 50: Nifty 50 includes 50 large companies listed on the NSE.
Stocks like Reliance, HDFC Bank, and Infosys have a higher weightage because of their large free-float market cap.
If Reliance moves up 2%, it impacts Nifty more than a smaller company.
B. Example – Sensex: Sensex has 30 stocks from the BSE.
It also uses free-float market cap to decide the weight of each stock.
Stocks like TCS, ICICI Bank, and HUL have more influence on Sensex movement.
In Short:
Bigger the company (in terms of free-float market cap), more it affects the index.
Index value tells us whether the overall market is going up or down.
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