The NIFTY 50 Index is a benchmark for the Indian stock market, representing 50 of the largest, most actively traded companies on the National Stock Exchange (NSE). But have you ever wondered how this index value is actually calculated? Let’s break down the process.

Step 1: Market Capitalization of Each Company

The calculation starts with finding each company's market capitalization, which is done by multiplying its total outstanding shares by its current stock price:

Market Capitalization = Outstanding Shares × Current Stock Price

Step 2: Adjust for Free-Float Market Capitalization

Not all shares of a company are freely traded. The NIFTY 50 index only considers “free-float” shares, which exclude promoter holdings or any shares that are locked-in. By multiplying each company’s market capitalization by its free-float factor (percentage of shares available for public trading), we get the free-float market cap:

Free-Float Market Cap = Market Capitalization × Free-Float Factor

Step 3: Calculating the NIFTY 50 Index Value

Finally, the index value is calculated using the weighted average of the free-float market capitalization of the 50 companies. The NIFTY 50 is based on a set base year value (1995) and a base market cap (set to 1000). Here’s how it’s done:

NIFTY 50 Index = ∑(Free-Float Market Cap of Each Company) / Base Market Cap × 1000

This method ensures the index reflects only the shares actively traded in the market.