Index

A stock market index is a numerical indicator that measures the price performance of a defined basket of stocks. It provides a single number that represents the overall direction and magnitude of movement in that particular market segment, making it easy to gauge market health at a glance.

In India, the two most widely followed indices are the Nifty 50 (50 large-cap stocks on the NSE) and the BSE Sensex (30 stocks on BSE). Beyond these headline indices, there are sectoral indices (Nifty Bank, Nifty IT, Nifty Pharma), thematic indices (Nifty ESG, Nifty Infrastructure), and strategy indices (Nifty Low Volatility 30, Nifty Alpha 50).

Indices are constructed using either market-capitalisation weighting or free-float market-cap weighting. The Nifty 50, for instance, uses free-float market-cap methodology — meaning only publicly tradeable shares count, not promoter-held shares. This gives larger companies like Reliance Industries and HDFC Bank a proportionally bigger impact on the index value.

Index composition is not permanent. The NSE Index Maintenance Sub-Committee reviews the Nifty 50 semi-annually (in March and September) and can add or remove stocks based on liquidity, Market Cap, and trading frequency criteria. Being included in a major index often boosts a stock's price because Index Funds and ETFs tracking that index must buy the new constituent.

For investors, indices serve three main purposes: as a benchmark to compare your portfolio's returns (did you beat the Nifty this year?), as the basis for passive investing through index funds and ETFs, and as the underlying for derivative products like Nifty futures and options.