Index’s job is to capture market movement. Then why only 50 stocks?
How it will capture the market you only add two or three companies from the sector?
How will it be accurate?
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NIFTY is a benchmark index of NSE which shows the overall market sentiment. Adding the smallcap and Penny stocks into it will cause misrepresentation of market. This is because there is lot of volatility and suspicious promoter activities associated with these stocks.
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The 50 stocks are carefully picked based on several stringent criteria and from different sectors.
http://www.nseindia.com/products/content/equities/indices/cnx_nifty.htm
Nifty almost captures 67% of the market cap. Among 1500 odd stocks in NSE, if picking only 50 among them (from 23 different sectors) would capture the 67% of market cap, I would say it is a best method to see the market sentiment rather than making the system complex with remaining 1450 stocks.
Also, the stocks which does not qualify under Nifty and sub classified into different indices and hence looking at them separately will give idea what is going on in Mid cap etc.
I would say Nifty with 50 stocks represents the world’s best index.
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How many stocks an index should have is open to debate. Too little and it may not capture the true sentiment of the economy and too much may bring in a lot of noise.
In the US, S&P 500 (like the name suggests it has 500 of the largest stocks with HQ in US), Dow jones has only 30 stocks and Russel 2000 (has 2000 stocks). If you have to go by the popularity the S&P 500 has kind of overtaken the others, as it probably has the right amount of stocks to capture the sentiment of the US economy.
Coming to Nifty, India just doesn’t have enough stocks that can qualify the stringent rules to become part of the index. If India becomes like a US tomorrow, I am sure an index that has a lot more stocks will gain more popularity like it has happened in the US.
Remember the job of the index is not to capture the election results itself, it is to be like an exit poll. Exit poll of a small sample of data that can capture the sentiment of the entire nation.
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S&P CNX NIFTY index is considered as Benchmark representing certain criteria. What criteria to be considered depends on the purpose of index construction. At the top, stocks that are left in the bucket after applying the criteria are 50 for NIFTY. Please note that the index constituents are not static, they keep getting replaced based on non-satisfaction of criteria. NSE documents the changes in the 'Index Maintenance' section.
Coming on to ur curiosity, Nifty index does not represent the whole market, but rather the economic state of India(refer Index Methodology). To represent the whole market, wht indices the financial institutions consider to invest are CNX 500 and BSE 500.
May I know why this thought arise in you?
it is similar to asking why can’t every city in India become the capital of its respective state!
Haha! stupid question, eh?
But going by your theory, it is similar to say that we need only election in state capitals to elect PM!! 
nope. i wanted to know wht market scenario/situation made u to rise that question.
i hv not given a theory, i hv given an analogy.
I read somewhere that index should reflect the whole market. I wondered how it will reflect when you have 50 stocks in your prime index when you have 1500 stocks listed.
Pardon my english!
In Engineering, we use something called called filters, to filter out the noise in signals (signal conditioning). Noise are unwanted values which tend to give the erratic behavior when clubbed wholesome.
Similarly, all the penny stocks and low and mid cap stocks are noises which could corrupt the index as a whole. Hence they have been filtered out to resemble the market.
Its not important what everyone in the market thinks about, but it is important what majority of the people think.