For active traders or investors, or for that matter anyone who has had the time to look at the nitty-gritty of the stock market, the term Nifty 50 Index would be quite familiar. It is an index that gives the performance of the top 50 stocks listed on India's National Stock Exchange, popularly known as the NSE. It serves as a benchmark, making very clear how the stocks in the market are performing.

Each stock in the index has a weightage, computed based on free-float market capitalization. Now what's so special about this weighting? This comes in handy as it will give an idea of how a stock would influence the general movement of the index. The higher the weight of the stock in the index, the higher its influence will be in the fluctuation of the index.

Now that we know why nifty weightage is important, let's dig into how it works and also how it is calculated.

What is Nifty 50 Weightage?

The nifty weightage represents the share and strength of each component in the Nifty 50 index. It is calculated on the basis of the free-float market capitalization of every constituent in relation to the aggregate market capitalization of all the constituents in the Nifty 50.

This system ensures that the larger and the more liquid companies influence the index. For example, if Reliance Industries carries a weightage of 10%, then a 1% fluctuation in the stock price would strongly influence the index as compared to the influence a company having smaller weightage will hold.

The weightage of sectors keeps changing from one to another. Some of the high-share prominent sectors are financial services, IT, and consumer goods because of their economic importance. To understand the trends prevailing in the market and subsequently take decisions accordingly, a person needs to understand the above also.

How Nifty is Calculated?

Nifty 50 Index is the index of the top 50 Indian companies listed on the NSE of India. The methodology used to calculate the index is free-float market capitalization-weighted in such a way that all distortions caused by promoter or locked-in shares are removed from the reflection of the actual market situation.

Let's now take a deep dive into the process adopted to calculate the Nifty 50 Index.

1. Calculate Free-Float Market Capitalization.

Step one will be finding free-float market capitalization for each share that is a part of the index. This calculation depends on the shares available for floating in the open market. Those shares are excluded from this calculation held by promoters, the government, or other similar bodies that don't participate in regular trading in markets.

The calculation of free-float market capitalization is obtained from:

Multiply the total market capitalization of a company, that is, the total number of outstanding shares multiplied by the current market price, by its free-float factor. Free float factor is percentage of the shares that are freely available for trading

For example, if the market capitalization of a company is at ₹10,000 crores, and the free-float factor of that company is 50%, then free-float market capitalization of that company would stand at ₹5,000 crores

2. Weightage Assignment

After determining the free-float market capitalization of all the Nifty 50 stocks, one proceeds to allocate weightage to each stock individually. It is through weightage that the contribution of the stock towards the final index value is determined.

Weightage of a stock can be calculated by taking its free-float market capitalization and dividing it with the total free-float market capitalization of all the 50 stocks under the index.

The more the free-float market capitalization, the more impact it has on the index.

3. Base Value Rebalance

The base market capitalization is divided by the sum of the free float of all 50 companies involved to get the value of the index. That result is then multiplied by the base value of 1,000 to standardize the index.

Making It Relevant To The Market

This methodology ensures that the index is not only dynamic but also reflective of real market performance. It rejects promoter-held shares in order to remove undue influence arising from entities that have no interest in regular trading in the market. The Nifty 50 Index becomes, then, the most reliable barometer of change in the market, able to reflect the mood and performance of the most vital sectors and enterprises in the economy.

List of Top 10 Nifty 50 Stocks Weightage

These companies significantly influence the Nifty 50 index due to their large weightage.