NISM-Series-X-A: Investment Adviser (Level 1) · Securities Market Segments
Equity Market Indices and Market Statistics: Free-Float Method Explained
Updated 11 October 2026 · Fact-checked
A stock index tracks a basket of shares as one number. Nifty 50 and Sensex use free-float market capitalisation weighting. Index value = current free-float market cap ÷ base market cap × base value. Free-float excludes promoter and other locked-in holdings. You solve questions by finding free-float cap, then applying the ratio.
Understand Equity Market Indices and Market Statistics
A stock market index is a single number that shows how a chosen group of shares is moving. It lets you read the market's mood without checking hundreds of prices. It also serves as a benchmark to judge how a portfolio or mutual fund has performed.
Indices differ in how they weight stocks. In a price-weighted index, a higher-priced share counts for more. In a market capitalisation weighted index, a bigger company counts for more. Market capitalisation = share price × number of shares issued.
Nifty 50 (NSE) and Sensex (BSE, 30 stocks) use the free-float market capitalisation method. Free-float shares are those available for trading by the public. Shares held by promoters, governments, strategic holders and locked-in holders are excluded. This makes the index reflect what investors can actually buy.
Every index has a base date and a base value. Nifty 50 uses a base value of 1,000, and Sensex uses a base value of 100. The index value on any day is the current free-float market cap divided by the base market cap, multiplied by the base value. Index maintenance adjusts the base for corporate actions such as new listings, rights issues and share changes, so the index does not jump for reasons unrelated to price.
For your exam, know the difference between Nifty and Sensex, the logic of free float, and why market-cap weighting suits benchmarking.
Key formulas to remember
- Market capitalisation
- Market cap = Share price × Number of shares issued
- Full market cap uses all issued shares.
- Free-float market cap
- Free-float market cap = Share price × Number of free-float shares
- Free-float shares = issued shares less promoter, strategic and locked-in holdings. Free-float factor = free-float shares ÷ issued shares.
- Index value
- Index value = (Current free-float market cap ÷ Base market cap) × Base value
- Base market cap is adjusted for corporate actions through the index divisor or base adjustment.
- Weight of a stock
- Weight = Stock's free-float market cap ÷ Total free-float market cap of index × 100
- Weights are in percent and sum to 100.
- Index return
- Index return % = (Closing value − Opening value) ÷ Opening value × 100
- This is a price return and excludes dividends. Total return indices include dividends.
How to solve Equity Market Indices and Market Statistics questions
Use this order for numerical and conceptual questions on index construction.
- 1Read what is asked: index value, weight, free-float cap or return.
- 2Identify the weighting method. If it says free-float, exclude promoter and locked-in shares.
- 3Compute free-float shares = issued shares × free-float factor, if given as a percentage.
- 4Compute free-float market cap = price × free-float shares for each stock.
- 5For an index value, use current cap ÷ base cap × base value. For weight, divide one cap by the total.
- 6Check units (₹ crore, lakh shares) and keep them consistent.
- 7Sanity check: weights sum to 100 and the index moves in the same direction as total cap.
Quickest way: Ratio shortcut for index value
When to use it: Use when the question gives current and base free-float market caps and a base value.
- Divide current cap by base cap to get a ratio.
- Multiply the ratio by the base value.
- For a change in index, apply the same percent change in total free-float cap, if the base is unchanged.
- Eliminate options that use full market cap when free float is stated.
Common mistakes in Equity Market Indices and Market Statistics
Using full market cap instead of free-float market cap.
Market cap is the more familiar term.
Fix: Whenever the index is Nifty or Sensex, multiply shares by the free-float factor first.
Saying Sensex and Nifty use different weighting methods.
They are run by different exchanges, so students assume different methods.
Fix: Both use free-float market cap weighting. They differ in exchange, number of stocks and base value.
Mixing up base values.
Both numbers look similar to memorise.
Fix: Nifty 50 base is 1,000. Sensex base is 100.
Thinking a higher share price means more weight in the index.
Price-weighted indices work that way and are discussed in the same section.
Fix: In a market-cap weighted index, weight depends on free-float cap, not price alone.
Treating index return as including dividends.
Students assume the index shows the full investor return.
Fix: A price index ignores dividends. Only a total return index (TRI) includes them, and TRI is the preferred benchmark for fund comparison.
Worked examples
Example 1
An index has a base free-float market cap of ₹50,000 crore and a base value of 1,000. The current free-float market cap is ₹65,000 crore. What is the index value?
Show the solution
- Ratio = 65,000 ÷ 50,000 = 1.3.
- Index value = 1.3 × 1,000 = 1,300.
Answer: 1,300
Example 2
A company has 200 crore shares issued, of which promoters hold 60%. The share price is ₹250. The total free-float market cap of the index is ₹4,00,000 crore. What is the company's weight in the index?
Show the solution
- Free-float shares = 200 × (1 − 0.60) = 80 crore.
- Free-float market cap = 80 crore × ₹250 = ₹20,000 crore.
- Weight = 20,000 ÷ 4,00,000 × 100 = 5%.
Answer: 5%
Exam tips
- Expect conceptual MCQs asking what free float means and which shares are excluded.
- Remember that a wrong answer costs 25% of the question's marks, so do not guess blindly on 2-mark caselet questions.
- In numerical questions, do the free-float step first. Traps often offer the full-cap answer.
- For benchmark questions, pick the index that matches the fund's investment universe, and prefer a total return index for comparison.
Practice questions from Securities Market Segments
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Equity Market Indices and Market Statistics in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Equity Market Indices and Market Statistics: frequently asked questions
How is Nifty 50 calculated using free float?
Each stock's free-float market cap is its price times its free-float shares. The sum of these is divided by the base market cap and multiplied by the base value of 1,000. Corporate actions are adjusted in the base so the index stays continuous.
What is the difference between Sensex and Nifty?
Sensex is the BSE index of 30 stocks with a base value of 100. Nifty 50 is the NSE index of 50 stocks with a base value of 1,000. Both use free-float market cap weighting.
What is free float?
Free float is the portion of a company's shares available for public trading. It excludes promoter, government, strategic and locked-in holdings.
Why are indices used as benchmarks?
An index shows what a passive investor in that market segment would have earned. You compare a portfolio or fund against it to judge whether the manager added value.