How Stock Indices Like the Sensex and Nifty Are Built

What a stock market index measures, how the Sensex and Nifty 50 choose and weight their companies, and why index design matters for investors.

When news reports say “the market rose 1 percent today”, they usually mean an index, such as the Sensex or the Nifty 50, went up. What exactly is an index?

What an index is

A stock market index tracks the performance of a selected group of stocks, representing a market or segment. It turns thousands of price movements into a single number.

India’s main indices

Sensex: launched by the Bombay Stock Exchange in 1986, with a base value of 100 in 1978-79. It includes 30 large, well-established companies.
Nifty 50: launched by the National Stock Exchange in 1996, with 50 large companies across sectors.

Choosing companies

Index providers select companies based on:

Size (market capitalisation).
Liquidity: how easily shares trade.
Sector representation.
Listing history and other criteria.

Indices are reviewed periodically, usually twice a year, and companies can be added or removed.

Weighting

Both indices use free-float market capitalisation weighting:

Market capitalisation = share price x number of shares.
Free float counts only shares available for public trading, excluding those held by promoters or governments.

Larger companies have bigger weights. A 1 percent rise in a heavily weighted stock moves the index more than a 1 percent rise in a smaller one.

Why design matters

Concentration: a few large companies can dominate an index.
Index funds and ETFs track these indices, so inclusion can boost demand for a stock.
Survivorship: poorly performing companies are removed, which can make indices look better over time than an average stock.

Other types of index

Sectoral indices such as banking or IT.
Broader indices covering hundreds of companies.
Equal-weighted indices, giving each company the same weight.

The bank effect

Banks and financial companies make up a large share of the Nifty 50. On a day when bank shares rise sharply, the Nifty rises even if many other stocks fall. Knowing the weights helps explain index moves.

Thinking the Sensex represents the whole Indian economy

The Sensex tracks 30 large listed companies. Many parts of the economy, such as small businesses and agriculture, are not represented.

Key takeaways

An index tracks a selected group of stocks as one number.
The Sensex has 30 companies; the Nifty 50 has 50.
Both use free-float market capitalisation weighting.
Index design affects concentration, index fund flows and what the index represents.