An index provider is a company that calculates stock market indices, such as the Nifty 50 or the Sensex, and licenses them to funds. An index tracks a group of shares as one number. For example, the Nifty 50 tracks fifty of the largest companies listed on the National Stock Exchange. When the news says that the market rose 1% today, it usually means that an index rose 1%.
How is an index calculated? The provider first chooses the companies, using written rules. Then it gives each company a weight, usually by its size. Size here means the market value of the company's shares that are available for trading. This is called free-float market capitalisation. A bigger company counts for more. During trading hours, the provider recalculates the index several times a second from the live share prices. Every six months or so, it reviews the list. It removes companies that have shrunk and adds companies that have grown.
Indices matter for two reasons. First, index funds and ETFs copy an index. Say an index gives one bank a weight of 12%. An index fund of ₹1,000 crore must then hold ₹120 crore of that bank's shares. When the provider adds a company to the index, every such fund must buy its shares on the same day. So a change to an index can move a share's price.
Second, other funds are judged against an index. An index used in this way is called a benchmark. Imagine a fund that rose 10% in a year while its benchmark rose 12%. Its manager did worse than the index. The fund's investment management system compares the fund with its benchmark every day.
Funds pay the provider a licence fee to use its indices. The provider also sells the index values and the list of companies in each index to financial data terminals, which show them to analysts. Some indices include only companies with a good environmental and governance record. For these, the provider uses ESG ratings.
In India, each of the two main stock exchanges has its own index company. Global index providers calculate the indices that foreign funds follow when they invest in India.