What moves Sensex or Nifty?

We have seen in the previous post the constituents of Sensex/Nifty and their weights in the index. Lets see what is the effect of price change of a stock on the index. We will take the example of S&P CNX Nifty. As discussed before Nifty is an index based on full market capitalization i.e. the index is proportional to the sum of the market capitalization of all its constituent stocks. The weights of the stocks in the index will vary. Lets take the data of 31 December 2007 for understanding the concept. Nifty closed at 6138.6 on December 31, 2007. The top four weighted stocks in Nifty were:

Stock Name	Market Capitalisation	Weightage
	(Rs. Crores)	%
Reliance	4,19,043	11.89%
ONGC	2,64,568	7.51%
NTPC	2,06,879	5.87%
Bharti Airtel	1,89,100	5.37%
Total	35,22,527	100%

Suppose Reliance's stock price changes by 10%, how will Nifty change?
This is a very simple question. Since market capitalization is directly proportional to stock price, Reliance's market capitalization will increase by 10%. Assuming other constituents of Nifty unchanged this will lead to an increase in Nifty value by:

Change in Total Market Capitalization of all constituents of Nifty = Change in Market Capitalization of Reliance = 10% of 419043 = 41,904.3

New Total Market Cap = 35,22,527 + 41,904.3 = 35,64,431.3

New Nifty Value / New Total Market Cap = Old Nifty Value / Old Total Market Cap

So, New Nifty Value = 6138.6 * 35,64,431.3 / 35,22,527 = 6211.625

Change in Nifty value = 73.025
% change in Nifty = 1.1896%

We got that a 10% change in Reliance's stock price will change Nifty by 1.1896%. This is same as the weight of Reliance in Nifty. So, all this calculation was meaningless and we can find the change directly from the weight of that stock in Nifty :).