Because there are more than 5000 stocks listed and traded on the Indian Stock Markets, it is in general not possible to say what the overall market movement was, on a particular day. One might suggest to take the advance/decline ratio (ie the number of stocks that increased to those decreased) But it is very much possible that most of the stocks that increased on a particular were traded in a very small quantity (say 1,000 shares on an average), though the trades on the shares whose value decreased were traded in a large quantity(say an average of 1,00,000 shares). In this case we would have jumped to a wrong conclusions.
So, the Indises are created. These indices generally cover 30-500 shares. In India the Sensex has 30 shares and Nifty has 50. Each stock is given a weightage, which may change on a daily basis.(though very slightly) In most of the cases, the weightage is dependent on the market capitalisation of the individual stock. The weighted average of the share prices of these shares give the value of sensex. (Sometimes there is a multiplicative factor multiplied to the final weighted average as well)
The way in which the stocks are chosen for a particular index depends on the market cap and 'beta value'(related to standard deviation in the share price). Also, sometimes sectoral weightage is also kept in mind before deciding the final list.
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