Short answer: Nifty and Sensex move when the free-float market capitalisation of their constituent stocks changes—especially the largest weights. The big drivers are price moves in heavyweights, index methodology (weights, divisor), earnings and sector trends, domestic SIP/FPI flows, corporate actions, and periodic rebalancing. (Nifty Indices, NSE India Archives, asiaindex.co.in)
Why this matters
For Indian investors, index levels dictate fund NAVs, ETF tracking, asset allocation, and even sentiment. Understanding what really moves Nifty 50 and S&P BSE Sensex helps you read markets, set expectations, and avoid noisy narratives.
How Nifty & Sensex Are Calculated (First Principles)
Free-float market-cap formula
Both indices are free-float market-cap–weighted. At any time t:
Index Levelt=∑i=1N(Pi,t×Free-Float Sharesi,t)Divisort\text{Index Level}_t = \frac{\sum_{i=1}^{N} \left(P_{i,t} \times \text{Free-Float Shares}_{i,t}\right)}{\text{Divisor}_t}
- Free float excludes shares not readily tradable (e.g., promoter/government holdings, strategic stakes). (Nifty Indices, whiteoakindia.com)
- Divisor keeps the index continuous when events like splits, bonuses or special dividends occur (so the index doesn’t jump purely due to corporate actions). (NSE India Archives, Nifty Indices)
- Nifty 50 is drawn from the Nifty 100, uses free-float weights and liquidity (impact-cost) screens. Sensex tracks 30 large, liquid BSE stocks using free-float weights. (Nifty Indices, asiaindex.co.in)
Impact-cost screen (Nifty 50): To be eligible, a stock must show ≤0.50% market impact cost for 90% of observations for a specified basket size—ensuring tradability. (Nifty Indices)
Rebalancing cadence
- Nifty 50: semi-annually, effective last working day of March and September.
- Sensex: semi-annually, typically June and December. (Nifty Indices, asiaindex.co.in)
Rule of thumb: If Nifty is at 24,000, a stock with 10% weight rising 1% adds ≈ 24 index points:
Contribution (points) = Index Level × Weight × Stock Return = 24,000 × 0.10 × 0.01 = 24.
The Core Drivers of Index Moves
1) Heavyweights & sector mix
A handful of large constituents (banks, oil & gas, IT) exert outsized influence. A 1–2% swing in a top-5 stock can move the headline index by dozens of points, even if most stocks are flat. (This is a feature of cap-weighting, not a bug.) (Nifty Indices)
2) Earnings, guidance & valuation resets
Quarterly results, margin commentary, order books, and corporate actions (mergers, FPO/OFS increasing free float) change expectations and sometimes the free-float itself, moving weights over time. Divisor adjustments prevent mechanical jumps around splits/bonuses/special dividends. (NSE India Archives)
3) Flows: Domestic SIPs vs FPIs
Persistent SIP inflows provide steady DII demand. July 2025 set records: equity MF net inflows ₹42,702 crore; SIP contributions ₹28,464 crore and 9.11 crore active SIP accounts—offsetting periods of FPI selling. (Reuters, AMFI India)
4) Global cues & macro
US yields, crude oil, USD/INR, China demand, and geopolitics sway sectors like financials, IT and energy—rippling into the cap-weighted index through the heavyweights.
5) Rebalancing & constituent changes
Semi-annual index reviews add/delete names to better reflect the market. Recent changes in Sensex constituents (e.g., effective June 23, 2025) are typical of this process and can trigger passive flows. (The Economic Times)
Visual: How top weights drive daily Nifty moves
Illustrative chart (fictional data) showing contributions (in index points) from select heavyweights on a sample day.
Download the chart
Methodology Nuances Most Investors Miss
Free float ≠ total shares
Promoter/government holdings and other locked-in stakes are excluded. That’s why two companies with similar total market caps can have very different index weights. (whiteoakindia.com)
Price Return (PR) vs Total Return (TRI)
- PR index = pure price changes.
- TRI includes dividends as dividend points (via the divisor), giving a truer measure for long-term performance and fund benchmarking. (NSE India Archives)
Liquidity matters
Nifty’s impact-cost criterion ensures entrants are actually tradeable at scale, keeping the index investable for ETFs/derivatives. (Nifty Indices)
Worked Example: From stock move to index move
- Assume Nifty 50 at 24,000; Stock A weight 8%; Stock A up 2% today.
- Points contribution = 24,000 × 0.08 × 0.02 = 38.4 points.
- If Stock B (weight 6%) falls 1%, it subtracts 24,000 × 0.06 × 0.01 = 14.4 points.
- Headline move = sum of all constituent contributions after divisor adjustments.
Practical Takeaways for Indian Investors
- Don’t overread breadth vs index: On some days, many small/mid caps may rise while a few heavyweights drag the index down (or vice versa). That’s the math of cap-weighting.
- Use TRI for long-term comparisons: When evaluating funds, prefer TRI-linked benchmarks to capture dividend effects. (NSE India Archives)
- Watch review months: Nifty (Mar/Sep) and Sensex (Jun/Dec) reviews can create passive flows and short-term volatility. (Nifty Indices, asiaindex.co.in)
- Track flows: Sustained SIP inflows can cushion markets in risk-off phases—even when FPIs sell. July 2025 data is a good example. (Reuters, AMFI India)
FAQs
What exactly is “free float”?
Shares readily available for trading—excluding promoter/government holdings and other locked-in stakes. This is what index weights are based on. (whiteoakindia.com)
If a company does a stock split, will Nifty/Sensex jump?
No. The divisor is adjusted so corporate actions don’t mechanically move the index; only economic value changes should affect levels. (NSE India Archives)
How often are Nifty and Sensex reviewed?
Nifty 50: semi-annually (effective last working day of March/September). Sensex: semi-annually (June/December). (Nifty Indices, asiaindex.co.in)
Why does one stock seem to “move the market”?
Large weights mean a big price change in that stock can add/subtract dozens of index points—even if most other stocks are quiet. That’s inherent to cap-weighting. (Nifty Indices)
How do dividends show up in the index?
In the TRI, dividends are translated into dividend points via the divisor methodology; the PR version excludes them. (NSE India Archives)
Related reading (Endovia Wealth)
- Basics of Market Capitalization
- What Is Volume in Trading?
- What Is an IPO? Process Explained
Sources
- NSE Indices—Broad Market Methodology & FAQs: free-float, impact cost, eligibility. (Nifty Indices)
- NSE Methodology (dividend points/divisor): how corporate actions are handled. (NSE India Archives)
- Asia Index (S&P BSE Sensex) factsheet: free-float weighting & semi-annual reconstitution. (asiaindex.co.in)
- NSE Rebalancing Calendar: Nifty 50 effective review months. (Nifty Indices)
- AMFI data & July 2025 flows: domestic inflow records and SIP participation. (Reuters, AMFI India)
Bottom line: Indices are math-first: free float × price / divisor. Day to day, the heaviest weights dominate. Over time, earnings and flows steer the ship, while rebalancing keeps the basket representative of India’s evolving market.