Market Indices: How a Stock Market Index Works

The dinner rush is over when the evening's headline reaches Maya: Sensex down 876 points, Nifty 50 down 257. That morning she made the first move of her paper rehearsal: ten SBI shares, bought on paper at the open. SBI closed 1.15% higher. Her share rose on the day the market fell.

Why one number? No one can follow fifty prices at once. The idea is old: the Dow Jones Industrial Average was first published on 26 May 1896, one number for 12 industrial shares, starting at 40.94. It is still published, now with 30 companies.

An index is a basket of shares and a published recipe: which shares are in (its constituents: show the note on Constituent, or members), how much each one counts, and where the count started. The firm that keeps the recipe and does the sums is the index provider: show the note on NSE Indices: NSE Indices, part of the National Stock Exchange of India (NSE), for the Nifty 50; BSE Index Services, owned by BSE (formerly the Bombay Stock Exchange), for the Sensex.

An index point is not a rupee. The Nifty 50 was set at 1000 points on 3 November 1995, when its basket was worth ₹2.06 lakh crore. On 19 October 2026 it stood at 22888.95: prices in the basket, measured the index's way, were about 22.9 times their 1995 level. The provider adjusts its starting sum whenever a member is replaced or a company issues new shares, so only price moves change the number, never a new company joining. Points are the unit of the ruler, the way degrees are the unit of a thermometer, and a level of 22889 does not say whether shares are cheap or dear.

A basket is not the whole market. The Nifty's 50 companies are about half (49%) of the value of all the shares the public can trade on NSE, as of 30 September 2026. "The market fell" means this basket fell, and SBI, a member, rose against it.

You cannot buy the number. You can buy a share that is in the basket (one SBI share closed at ₹973.70 that day), a fund that holds the whole basket in the index's own weights (an index fund or ETF), or a contract on it (the Options course). Never the points.

The rule is one division: percent = points ÷ the level before × 100. On 19 October 2026 the Nifty fell 257.20 points from 23146.15, which is 1.11%; the Sensex fell 876.37 points from 74729.27, which is 1.17%. The Sensex moved 3.4 times the points because its level was 3.2 times higher. Same day, nearly the same fall.

The same points shrink as the level grows. A 257-point fall was a quarter of the Nifty at its 1995 base of 1000, 16% of it in May 2004, 2.6% in July 2017 (the month it first closed above 10000) and 1.11% on 19 October 2026. Try one yourself: a "200 points" headline, with the Nifty at Friday 16 October 2026's close of 23146.15. 200 ÷ 23146.15 × 100 = 0.86%. At the 1995 start of 1000, the same headline would have meant 20%.

The trap is on record. On 17 May 2004 the Nifty fell 193.65 points, 12.24%. On 4 June 2024, the day India's general election results came in, it fell 1379.40 points, 5.93%. Seven times the points, half the fall. (The Sensex fell 565 and 4390 points on those days: the same story.)

Then name the period. On the same evening, 19 October 2026, the Nifty 50 was down 1.11% on the day, 13.06% below its record close of 26328.55 (2 January 2026), 10.97% down on a year, up 164% on ten years, and 22.9 times its 1995 base. Every one is true; a figure means something only with its period.

These are all the price index, the number on the news; the cash companies pay out is left out until chapter 9. The habit, in one sentence: say the index, the percent and the period. "The Nifty 50 fell 1.11% on Monday."

The idea first: to get into the Nifty 50, a company must be among the largest, be easy to trade in big amounts, and already have futures and options: show the note on F&O on it; to replace a member, it must be clearly bigger, not just a little.

NSE starts from the Nifty 100, roughly the 100 largest companies of its broader Nifty 500. A company must be allowed in NSE's futures and options (F&O) segment, where traders buy and sell contracts tied to a share's price; it must be cheap to trade in size, with a low impact cost: show the note on Impact cost, how much the price moves against you when you buy or sell a large amount at once; and it must have been listed for at least a month.

Those that pass are ranked by free-float market value, the value of the shares the public can trade (chapter 4). Then comes a buffer: a newcomer replaces a member only if it is at least 1.5 times the size of the smallest member, so the list does not change on small moves.

NSE looks at six-month averages up to 31 January and 31 July, gives at least four weeks' notice, and makes the changes from the last trading day of March and September. A merger, demerger, delisting or suspension can force a change in between (corporate actions explains the first three).

A real review. On 10 August 2026 NSE Indices announced that from 30 September, BSE Ltd would replace Wipro. BSE's average free-float value was ₹140879 crore, 2.52 times Wipro's ₹55930 crore; the rule needed 1.5 times. TVS Motor (₹84566 crore) and Divi's Laboratories (₹82930 crore) were eligible too, but neither was 1.5 times the two smallest remaining members, HDFC Life (₹65666 crore) and Tata Consumer Products (₹73054 crore), so they stayed out. Wipro moved to the Nifty Next 50. Six months earlier, the March 2026 review had changed nothing.

A surprising detail: BSE Ltd owns: show the note on BSE Index Services the company that publishes the Sensex, the Nifty's rival. The rules do not care whose company it is.

What a change does, and does not do. Funds that copy the Nifty 50 had to sell Wipro and buy BSE to match the new list (that is how index funds work); NSE adjusted its sum at the swap, so the level did not jump. Nothing about Wipro's business changed that day: an index measures; it does not judge.

Some members never leave. Reliance Industries is one of eleven companies that have been in the Nifty 50 since its first day in 1995, by NSE's own count, along with HDFC Bank, ICICI Bank, SBI, Larsen & Toubro and Tata Steel.

Two words first. A company's market value (its market capitalisation) is its share price times all its shares (Market Cap & Stock Categories teaches it). Its free float is the part of those shares the public can trade: NSE leaves out holdings that are not normally for sale, chiefly the promoter: show the note on Promoter's, the founder or parent company that controls it, using the shareholding pattern each company files every quarter.

A member's weight is its free-float value divided by the free-float value of all 50. Why free float? NSE says it limits each company's influence in the index to the shares investors can actually buy.

Price is not weight. At the close of Wednesday 28 October 2026 one IndiGo share (InterGlobe Aviation) cost ₹4690.00 and one Tata Steel share ₹169.27, nearly 28 times less. Yet Tata Steel weighed more in the Nifty 50: about 1.34% against IndiGo's 1.01%. A share's price only says how the company is cut into pieces.

The whole company is not the weight either. On the same day TCS was worth ₹8.90 lakh crore in all and Infosys ₹4.56 lakh crore: TCS about twice as big. But TCS's promoter group, the Tata group, holds 71.77% of its shares; Infosys's holds 13.90%. Count only what NSE counts as free float and it flips: TCS ₹2.50 lakh crore, Infosys ₹3.96 lakh crore. So Infosys weighed 3.78% of the Nifty 50 and TCS 2.39%.

HDFC Bank has no promoter, so almost all of its value counts, which made it the heaviest member, about 10.01% that day.

Weights move every day. NSE's factsheet put HDFC Bank at 10.38% on 30 September; a month of price moves later it was about 10.01%, with no rule changed. In the Nifty 50 no weight is ever fixed: weights follow prices, and shift again when a review changes the members or NSE updates a company's free float from its quarterly filing.

Start in Maya's restaurant (an illustration). For every ₹100 she takes on a usual day, burgers bring ₹60, fries ₹25 and shakes ₹15. If burger sales fall 10%, the day loses ₹6 of every ₹100: 6%. If shakes fall 10%, it loses ₹1.50: 1.5%. The same 10% fall, four times the effect: what moves the total is each item's share times its move.

An index works the same way. A member's pull, in percent, is its weight times its move; in points, multiply by the level before.

On 19 October 2026, HDFC Bank, 10.38% of the basket on NSE's factsheet, fell 2.31%: 10.38% × 2.31% × 23146.15, the level before, is about 55 of the 257 points, a fifth of the fall from one company. SBI, 3.79% of it, rose 1.15%: 3.79% × 1.15% × 23146.15 is about 10 points the other way. That answers the question Maya carried out of her rehearsal: her share did not fight the market; it was a light member pushing up while heavier ones pulled down.

On 28 October 2026 Reliance Industries, about 7.6% of the basket, fell 3.19%, from ₹1196.20 to ₹1158.00, and took about 55 points: more than the index's whole fall of 50.90. The other 49 members together added about 4 points back.

Over a longer stretch the same sum works quietly. HDFC Bank, the heaviest member, fell about 32% in the year to 28 October 2026, while the Nifty 50 fell about 12%. Everyone who held the basket felt that fall, in proportion to HDFC Bank's weight.

Weight is concentrated. The ten heaviest members were 52.27% of the Nifty 50 on 30 September 2026, and 63.71% of the Sensex.

Where the comparison with Maya's menu stops: her shares of each ₹100 change only when her customers change; an index's weights change every time prices do (chapter 4).

Breadth is the number of members that rose, the advances, against the number that fell, the declines: NSE's own words, printed beside the index every day.

On 19 October 2026 the count and the index agreed. Nine of the 50 rose and 41 fell, and the index fell 1.11%: a broad fall. SBI was one of the nine.

On 28 October 2026 they disagreed. More members rose than fell, 26 against 24, and the average member rose 0.09%, yet the Nifty 50 fell 0.22%, because a few heavy members fell (Reliance, Infosys, Bharti Airtel, ICICI Bank and TCS) while more, lighter members rose. The fallers weighed 54.65% of the basket; the risers 45.35%.

NSE also turns counting into an index. The Nifty50 Equal Weight holds the same 50 companies with each counting the same, about 2%. In the year to 30 September 2026 it fell 2.06% while the Nifty 50 fell 8.09%: the same 50, counted equally, did better than the 50 weighed by size. Financial companies are 24.12% of it against 37.45% of the Nifty 50. Neither rule is better: one measures the money in the 50, the other treats every company alike.

Read both, predict neither. The index says what happened to the basket's value; breadth says how many joined in. Neither says what happens tomorrow.

A benchmark is an index used as the yardstick for a fund or a portfolio. India's two best known are kept by its two exchanges. The Nifty 50: kept by NSE Indices, 50 members from the Nifty 100, 1000 on 3 November 1995, launched on 22 April 1996, changes at the end of March and September. The Sensex: kept by BSE Index Services, 30 members from the BSE 100, a base of 100 for 1978-79, launched on 2 January 1986, changes in June and December. Both weigh members by free-float market value.

One market, two baskets. All 30 Sensex companies are also in the Nifty 50; the Nifty adds 20 more, BSE Ltd among them. So the two move together, but not identically: −1.11% and −1.17% on 19 October 2026, −8.09% and −9.70% over the year to 30 September. The Sensex holds fewer companies, so its ten heaviest weigh more (63.71% against 52.27%), and financial companies are 40.04% of it against 37.45%.

The world's best known benchmarks follow the same idea. The S&P 500 holds 500 leading US companies, covering about 80% of the US market's available value, weighted like the Nifty, since 4 March 1957. The FTSE 100 holds the 100 largest companies on the London Stock Exchange, since 3 January 1984 at 1000. At home, NSE also keeps bigger baskets and size bands, which the next lesson explains.

The other design adds prices. The Dow Jones Industrial Average holds 30 US "blue-chip" companies (large, long-established, well-known names) and is price-weighted: it adds up share prices, so a company with a higher share price counts more, however big it is. It is not a list of the 30 biggest US companies, though some guides describe it that way. Japan's Nikkei 225, calculated since 7 September 1950 from 225 companies on the Tokyo Stock Exchange, is price-weighted too. Chapter 4's rule, "price is not weight", holds for the Nifty, the Sensex, the S&P 500 and the FTSE 100, not for the Dow or the Nikkei.

Which one is yours? Compare your money with the benchmark that holds what you own (Asset Allocation for Beginners matches money to its job; Mutual Fund vs Index Fund vs ETF explains the funds).

A sector index holds one industry (the Nifty Bank, the Nifty IT); a thematic index follows an idea across industries (the Nifty Infrastructure; the Nifty CPSE, built from central public sector enterprises, companies the Indian government controls).

In a narrow basket each member weighs more. On 30 September 2026 Infosys was 3.35% of the Nifty 50 but 31.30% of the Nifty IT, more than nine times as much; HDFC Bank was 10.38% of the Nifty 50 and 18.61% of the Nifty Bank.

So a narrow basket can tell a very different story in the same year. In the year to 30 September 2026 the Nifty IT fell 17.68%, the Nifty 50 8.09%, and the Nifty Bank 0.01%.

Even the broad index leans toward one sector: financial companies are 37.45% of the Nifty 50, so how banks and lenders do is a large part of how the Nifty does.

Narrow baskets have rules of their own. The Nifty Bank holds 14 banks, the most its rules allow, and both sector indices cap the heaviest weights at each review, a method NSE calls periodic capped free float.

Maya's long-deadline money sits in a broad index fund, her own choice in the plan she wrote in Asset Allocation for Beginners. A Nifty 50 index fund's own performance table does not compare the fund with the Nifty 50 on the news. It compares it with the "Nifty 50 TRI". Why a different number?

A dividend: show the note on Dividend is cash a company pays its owners from its profit. The price return index, the number on the news, counts only price changes, so the dividends are left out. The total return index: show the note on TRI (TRI) adds each dividend back as if it were put back into the basket on the day the share goes without it.

How much it matters: over the five years to 30 September 2026 the Nifty 50 grew 5.13% a year on price and 6.38% a year with dividends. ₹1 lakh would have become ₹128420 or ₹136239, about ₹7800 apart. Over ten years the Sensex grew 10.03% and 11.35% a year: ₹260082 against ₹293023, about ₹33000 apart.

NSE's own advice is plain: an investment in index shares should be compared with the total return index, not the price index. That is why the funds' tables use the TRI.

Maya's fund receives the dividends, so its fair yardstick is the total return index; its costs then make it trail slightly (the fund costs of an earlier lesson), and tax is hers to work out (Tax on Shares and Trades shows how).

An option: show the note on Option is a contract that gives its buyer the right, not the duty, to buy or sell the index at a set level on a set date. Buyers pay more for options when they expect big swings. (The Options course teaches them.)

NSE works India VIX out from the best bid and ask prices of Nifty options. It is the market's expected volatility: show the note on Volatility, how much the index is expected to swing either way, over the next 30 calendar days, stated as a yearly percentage, by the method of the US exchange CBOE adapted to the Nifty.

Reading it: India VIX closed at 14.77 on 19 October 2026. As a yearly figure, it suggests a typical one-month swing of about 4% either way, roughly ±976 points around that evening's 22888.95. A sketch of a typical range, not a forecast: bigger moves happen.

A dated extreme: on 24 March 2020, the day after the Nifty's worst day on record (−12.98%), India VIX closed at 83.61. In the US, the original VIX closed at 82.69 on 16 March 2020, its highest close since its data begin in 1990.

What it is not: a signal to buy, sell or wait. It is the price of uncertainty, read from option prices.

Before she locks up, Maya reads the evening's headline once more, this time in five questions.

The same five questions work for any index, anywhere: the S&P 500 on a US evening, the FTSE 100 in London, a sector index on a results day. Each answer is one line, and each one came from a chapter of this lesson. One word was only borrowed: market value, which chapter 4 used to weigh each company. Maya knows one value well, her own restaurant's, set when a tenth of it sold for ₹1.5 lakh. How big is a listed company, and what makes it large, mid or small? That is where the next lesson begins.