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Sensex Calculation
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The BSE Sensex often termed as just Sensex is a calculator of the movements in the Indian stock market. It consists of 30 stocks/companies. The method used for calculating the Sensex is called the “free-float market capitalization-weighted method”. Let’s know more about the Sensex calculation.
Dive in!
The base year and the base index value of the Sensex is 1978-79 and 100 respectively.
Now you might be thinking why the base value is 100. Well, this is because this value makes the calculation and representation in the change of percentage easier.
The Sensex is an index that indicates the movements in the share prices of the stocks listed under the Bombay Stock Exchange (BSE). It was first compiled in 1986. A rise in the Sensex value indicates a general increase in the shares prices while a fall in the Sensex value shows a decrease in share prices.
Also Read: Nifty and Sensex
This means that the analysts or investors can identify the good and bad periods of the Indian stock market using the S&P BSE Sensex.
Sensex Calculation: Methodology Used
Prior to 2003, the Sensex was calculated on the “weighted market capitalization method”.
However, in September 2003, this was replaced by the “free-float market capitalization” method. This method (free-float) is used by the major indices around the world.
Free-float is the percentage of the total number of readily available shares issued by a company. It. therefore, does not include the shares held by the promoters and government-held shares.
Let’s assume that a company has a total of 100 shares.
Out of these, 20 are held by the promoters and the government. Now, the remaining 80 shares are the “free-floating” ones and are available for the general public.
Free Float & Market Capitalization
Market Cap or market capitalization is a way to find the value of a company.
Market Capitalization = Price x Quantity
Free-float market capitalization = Total market Cap X The Free float factor
The free-float factor is therefore determined by the percentage of free-float.
If we consider the above illustration of 80 free-float shares, the free float percentage will be 80% or 0.80.
Steps Involved In Sensex Calculation
When it comes to Sensex calculation, you are supposed to follow a set of steps. Here are those discussed for your reference:
- The BSE Sensex stocks are the list of top 30 companies that are shortlisted on the basis of criteria like total market cap, free-float market cap, etc.
- These companies are from sectors like Banking, IT, FMCG etc.
- Now, the market cap and the free-float market cap of each of the 30 companies is determined
- The market cap is multiplied by the free-float factor to find the free-float market cap
- Then, the free-float market cap (of the 30 companies) is added to get the total free-float market cap
- Now, the following formula is used to calculate the Sensex:
Sensex = (Total free-float market cap ÷ Base market cap) x Base Index
Note that the base year to calculate the Sensex is 1978-1979 and the base index is 100. (This is a static value)
The level of the Sensex index indicates the direct performance of the 30 stocks/companies listed under it.
Conclusion
The BSE Sensex is an index reflecting the movements of stocks under the Bombay Stock Exchange (BSE). Even though established in 1875, the stock exchange had its official index on 1st Jan 1986.
To summarize the Sensex calculation, Sensex = Sum of (weight of each stock x index of each stock)
Hope this helped. Happy trading!
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