A good index is a trade-off between diversification and liquidity. The computational methodology followed for construction of stock market indices are 

• Free Float Market Capitalization Weighted Index, 
• Market Capitalization Weighted index and the 
• Price Weighted Index. 

Free Float Market Capitalization Weighted index: 

The free float factor (Investible Weight Factor), for each company in the index is determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchange by these companies The Free float market capitalization is calculated in the following manner: Free Float Market Capitalization = Issue Size * Price * Investible Weight Factor The Index in this case is calculated as per the formulae given below:

Index = Free float current market capitalization/ Free Float Base Marked Capitalization X Base value

Market Capitalization Weighted index: 

In this type of index calculation, each stock in the index affects the index value in proportion to the market value of all shares outstanding. In this the index would be calculated as per the formulae below:

Index = Current market capitalization/ Base Market Capitalization X Base value

Price Weighted index: 

In a price weighted index each stock influences the index in proportion to its price per share. The value of the index is generated by adding the prices of each of the stocks in the index and dividing then by the total number of stocks.