How Stock Market Indices Like Nifty & Sensex Are Calculated
Ever wondered how the Nifty or Sensex number is worked out? Here’s the free-float market-cap method, simply explained.
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A stock market index tracks the overall movement of a group of stocks with a single number. India’s best-known indices — the Nifty 50 and Sensex — are built the same way.
Free-float market capitalisation
Both use the free-float market-cap method. A company’s weight in the index is based on the market value of only its freely tradable shares — excluding promoter and locked-in holdings. So larger, more widely held companies move the index more.
From prices to one number
The index sums the free-float market cap of all constituents, divides by a fixed base value, and multiplies by a base index level. As prices change through the day, the index updates in real time. The absolute number matters less than its change versus the base.
Why indices matter
- They are a quick gauge of market direction and sentiment.
- They serve as a benchmark to judge your portfolio or funds against.
- They can be invested in cheaply via index funds and ETFs.
Indices are reviewed periodically, adding and removing stocks to stay representative. For more, see what is Nifty 50 and what is Sensex.
