Under several indexes such as Sensex, Nifty 50 etc., scripts of several industries are included so my question is how is it determined as to which sector will represent how much %
Please explain, thank you.
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It is decided by the board of these indices like Nifty is handled by NSE and Sensex is handled by BSE. This percentage can change from time to time.
Okay, but my question was what’s the logic/criteria behind deciding the % each sector would represent
Nifty 50 constitutes those stocks which have the highest free float market cap and how do they calculate it? Let’s see
Mkt price * no. Share outstanding
(No. Of share outstanding means share which is not held by the promoter and its related party. So, that will give us share which are available to trade for public)
The company with the largest free-float market cap will represent the largest weight in the index. That explains why a Reliance in India or an Apple in the US has such a large weight in the index. This method of weighting index constituents is one of the most commonly-used approaches..
Now you can argue that the market cap of Infosys is just half that of TCS, it has a higher weighting in the Nifty compared to TCS. The reason is simple, the stock of TCS is still 74% owned by Tata Sons(i.e held by the promoter)