When the market started going down there were many who asked us what do you think is happening, why is the market going down, will it touch 9000 etc. Most of these questions were discussed in newspapers, TV Channels etc. There was one question by one Mr,Arun Tiwari which was “zara hut ke” [different] HOW IS SENSEX CALCULATED ?
Like all good things there is no one line answer to this one, To understand how is Sensex [Indian Context] calculated first we need to understand some terms.
1. Market Capitalization:
This term is popularly also known as “Market Cap” or not so known term “Capitalised Value”. It’s a measurement of economic size of a company.
Mathematical Representation
Market Capitalization = Number of Shares x Share Price
Depending on the value of the market cap, the company will either be a “mid-cap” or “large-cap” or “small-cap”. Interesting isn’t it ?
The second term we need to understand is “derived” from Market Capitalization.
2. Free Float Market Capitalization
Free-float market capitalization is defined as that proportion of total shares issued by the company which are readily available for trading in the market.
Meaning: The shares owned by government, directors, proprietors etc. are excluded .These shares are also known as “locked in” shares.
Mathematical Representation
Free Float Market Capitalization = Share Price x Free Float Shares
What is BSE-SENSEX (also known as BSE 30) composed of?
Now that you have understood the two major terms let us bring our focus to BSE SENSEX most of us know that BSE SENSEX is make up of 30 scripts These 30 scripts [Companies] are chosen and changed form time to time by BSE committee to accurately reflect state of stock market and has predefined criterions to fulfill before any company is included in the BSE 30.Details on these are outside the scope of this article.[You will probably get bored.]
Two Steps away from SENSEX:
1. Add the Free Float value of all the 30 shares.
(Infosys share price x No of free shares) + (HDFC Share price x No of free shares) …….and so on.
2. Map it to the base value to get today’s sensex value:
Like an NFO or an OLD IPO where the typical base price is of 10 rupees even BSE started with a base value of 100 in the year 1978-79.Everyday after that day we are mapping the index using “Index Divisor”
Meaning
If yesterday sensex was on 13055x with free floating market capitalization on 2855 crores [remember economic value of bse 30 shares] & today's free float market capitalization has increased to 3010 crores then today’s index value is :
Today’s Index Value = 13055x (3010 / 2855) the number 3010/2855 is the index divisor and is adjusted at times to accommodate corporate announcement’s which affect the market capitalization like share bonuses etc.
We have tried our best to explain the various concepts and calculations in the simplest form however we would love to hear from you to know that our efforts are in right direction and would like to hear from you how we can improve in the future.
Based on a query from Mr.Arun Tiwari
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