InvestorQ : Can anyone explain the methodology used to construct these indices?
Lavanya Subramanian made post

Can anyone explain the methodology used to construct these indices?

Answer
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sarah Leo answered.
2 years ago


Like any index number in economics, the stock market indices are also calculated with reference to a base date. In the case of the Nifty, the base date is November 03rd 1995 and the base value of the Nifty index on that data has been set at 1000. All index values that you see on a real time basis are with reference to this base date.

The Nifty Index is calculated using a float-adjusted market cap-weighted methodology. Therefore, larger companies with bigger market caps will have a much higher impact on the index. This explains why stocks like TCS, Reliance Industries and HDFC Bank have an inordinately large impact on the index as they are the companies with the highest market cap. These constituents of the index are constantly reviewed and changes made if necessary. All corporate actions like splits, bonuses and rights result in an adjustment to the index so that the net impact is neutral.