What is Stock Weightage

In any stock market index, the stock weightage assumes importance. For example, in India, the Nifty has 50 stocks, while the BSE Sensex has 30 stocks. Both the indices are weighted by free-float market cap. That means the weighting is done based on stocks that are not under promoter control. That is why you would find that although the market cap of Infosys is just half that of TCS, it has a higher weighting in the Nifty compared to TCS as the stock of TCS is still 74% owned by Tata Sons.

How is stock weightage decided? As we said earlier, it is a combination of the market cap and the free float. So only that portion of the market that is free float (not owned by promoters and connected persons) is considered for weighting in the index. This gives a truer picture of the importance in the market. Let us now look at stock weightage and stock market weightage in greater detail.

What are Stock Weightage and Stock Market Weightage?

To understand index construction, you need to understand how stocks are weighted. It is important to know how the index is constructed especially if one wants to be an index trader. By now you are aware that the Index is a composition of many stocks from different sectors that collectively represent the economy’s state. You can almost look at the index as a hypothetical portfolio that is most representative of the market as a whole and also the economy. To include a stock in the index, it should qualify certain criteria. Once qualified as an index stock, it should continue to qualify on the stated criteria.

Understanding stock selection criteria for Nifty

Let us spend a moment understanding the eligibility criteria for the selection of constituent stocks in the Nifty, as a proxy for a representative index, which can be easily accessed using a stock market app.

  • Market impact cost is the best measure of the liquidity of a stock. It reflects the costs faced when trading an index. For a stock to qualify for possible inclusion in the NIFTY-50, it should have traded with an average impact cost of 0.50% or less during the last 6 months for 90% of the days, evaluated for a basket size of Rs.10 crore.
  • The said company to qualify for inclusion in the index must have a listing history of a minimum of 6 months.
  • Only those companies that are currently allowed to be traded in the futures & options segment (F&O segment) are eligible to be considered for inclusion in the index.
  • A company coming out with an IPO will be eligible for inclusion in the index if it fulfills the normal eligibility criteria for the index for 3 month period instead of 6 months.
  • The Nifty index will be rebalanced on a semi-annual basis (twice a year). The cut-off date is January 31 and July 31 of each year to evaluate index changes if warranted. Normally, 4 weeks prior notice is given to the market from the date of change in the index.
  • Index governance is handled by a professional team index team. There is a 3-tier governance structure comprising the Board of NSE Indices, Index Advisory Committee (Equity), and the Index Maintenance Sub-Committee.

How to interpret index weights?

Once the above selection process is applied, the index constituents are selected and included in the index. Based on the selection procedure, the list of stocks is populated in the index. Each stock in the index is assigned a particular weightage. This weightage is free-float market-cap weighted. Weightage means importance.

Reliance Industries Ltd 10.01% JSW Steel 0.97%
HDFC Bank Ltd 9.59% Dr. Reddy Labs 0.97%
Infosys Ltd 8.60% Nestle India 0.92%

In the above table, Reliance has a 10.01% weightage on the Nifty 50 index, so it is as good as saying that 10.01% of Nifty’s movement can be attributed to Reliance. Similarly, HDFC Bank has a 9.59% weightage on the Nifty 50 index, so it is as good as saying that 9.59% of Nifty’s movement can be attributed to HDFC Bank. However, Nestle India has just about 0.92% weightage on the Nifty 50 index, so it is as good as saying that only 0.92% of Nifty’s movement can be attributed to Nestle India. This is the argument that applies to all constituents of the index.

How is Stock Weightage Calculated?

The logical question now is; How do we assign weights to the various stocks that make up the Index? How do we decide that Reliance should have a weight of 10.01% and Nestle should have a weight of 0.92%?

There are different ways to assign weights, but the Indian stock exchange follows the globally accepted and benchmarked “free-float market-capitalization” method of weighting. The weights are assigned based on the company’s free-float market capitalization and the larger the market capitalization, the higher is the weight.

Free float market capitalization is the product of the total free float number of shares outstanding in the market and the stock price. Let us take a live example. If a company, ABC, has 5,000 free float shares outstanding in the market, and the stock price is at 100 then the free-float market cap of ABC is 5,000*100 = Rs.500,000.

Understanding the logic of assigning weights to index constituents

Indexes like the Sensex and the Nifty in India are typically market cap-weighted. That means; the index constituents are weighted according to the total market cap or market value of their available outstanding shares. In India, only the free-float market cap or the non-promoter market cap is considered in this case to give a more precise picture. In market-cap-weighted indexes, a company’s representation in the index is based on the market capsize, and its market cap automatically contributes to the performance of the overall index proportionately. Weight increases with market cap.

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. Despite the development of hundreds of alternatively-weighted indexes in recent years, market-cap-weighted indexes based on free-float remain the gold standard largely because they are the most relevant for index traders who look for liquidity first and foremost. Among all the methods, the free-float market cap weighting addresses the issue of the importance of the stock and the liquidity of the stock.

A final word on the evolution of free-float indices. When market-cap weighting was first started, the market cap weighting was done on the total market cap. The original market-cap-weighted indexes included all of a company’s outstanding shares. However, this created practical problems. In many cases, the shares are closely held by promoters or could be government-owned, as in the case of many PSUs in India. Hence, they are not fully available for trade on the open market. So, a stock with a large market cap and hence a large weight in the index may just not be available in the market to buy or sell. That is impractical and that led to the creation of a free-float market methodology for weighting index components. Float adjusting an index means that only those shares that are readily available to the public for trading and investing are represented in the index.

Different Stock Weightage for Different Indices

Reliance Industries Ltd 10.01% JSW Steel 0.97%
HDFC Bank Ltd 9.59% Dr. Reddy Labs 0.97%
Infosys Ltd 8.60% Nestle India 0.92%
HDFC Ltd 6.55% IndusInd Bank 0.90%
ICICI Bank 6.41% Tata Motors 0.89%
TCS Ltd. 5.08% Power Grid 0.87%
Kotak Bank 3.67% Grasim Industries 0.84%
Hindustan Unilever 3.24% HDFC Life 0.83%
Axis Bank 2.83% Divi's Laboratories 0.82%
Larsen & Toubro 2.66% NTPC Ltd 0.81%
ITC Ltd 2.60% Hindalco Ltd 0.80%
State Bank of India 2.36% Bajaj Auto 0.79%
Bajaj Finance 2.34% Adani Ports 0.76%
Asian Paints 1.98% Cipla Ltd 0.72%
Bharti Airtel 1.82% Tata Consumer 0.66%
HCL Tech 1.57% SBI Life 0.65%
Maruti Suzuki 1.47% UPL Ltd 0.64%
Tata Steel 1.34% BPCL Ltd 0.64%
Wipro Ltd 1.18% ONGC Ltd 0.63%
Ultratech Cement 1.15% Britannia Industries 0.63%
Mahindra & Mahindra 1.09% Hero MotoCorp 0.55%
Sun Pharma 1.07% Eicher Motors 0.55%
Bajaj Finserv 1.07% Shree Cements 0.54%
Titan Co.Ltd 1.06% Coal India 0.45%
Tech Mahindra 1.00% Indian Oil 0.40%

You can see in the above list that the top 5 stocks account for over 41% of the overall Nifty weight and the top-10 stocks account for 59% of the Nifty weight. This may appear a tad skewed but that is the way indices are built globally.

Frequently Asked Questions (FAQ)

Which sector has the highest weightage in Sensex?

1 Finance 40.98
2 Information Technology 18.92
3 Oil & Gas 11.91
4 FMCG 7.99
5 Transport Equipment 3.98
6 Capital Goods 3.11
7 Healthcare 2.44
8 Chemical & Petrochemical 2.34
9 Telecom 2.2
10 Power 1.98
11 Metal, Metal Products & Mining 1.54
12 Housing Related 1.34
13 Consumer Durables 1.27

Remember, Financials include banks, housing finance, insurance, and NBFCs so it is a collection of several categories. The weight of healthcare has improved in the last 1 year after the COVID rally.

Which stock has the highest weightage in Nifty?

Reliance industries with 10.01% have the highest weight in the Nifty followed by HDFC Bank and Infosys in that order. However, this can keep changing as 50% of Reliance capital is not in free-float and that impacts free-float market cap.