The index counts only what it could buy.

Market capitalisation, minus what nobody can trade

A broad Indian equity index such as NIFTY 50 is float-adjusted market-capitalisation weighted. Company size decides how much a company counts, but the size used is not the full market capitalisation you met in 01.01.05.

Each company is given an Investible Weight Factor, shortened to IWF: the proportion of its shares actually available to ordinary investors. Holdings that are locked away — promoter holdings, and other categories the methodology specifies — are excluded from the count.

So the index weight is built from price × shares in issue × IWF. That figure is the free-float market capitalisation, and it is the one that matters.

Why an index is built this way

An index is meant to be followable. A fund tracking it has to be able to buy the shares in the stated proportions, and it cannot buy shares that are not for sale. Weighting by the full size would set the fund a task it could never complete.

The index value itself is then a ratio, not a rupee total: the combined free-float market capitalisation of the constituents compared with a base period, scaled by the base value. That is why an index reads as a level like 24,000 rather than an amount of money.

It also explains a result that surprises people. Two companies of identical full size can carry very different index weights, purely because one has more of itself in public hands.

A rule that decides who is in and how much they count must be re-run from time to time. That is when the arithmetic stops being quiet and starts moving real money.