What is SENSEX and How is it calculated?

Sensex

What is SENSEX and How is it calculated?

Sensex is one of the most prominent market indices in India. We keep hearing in the news that SENSEX has gone up or gone down. But what actually constitutes it, how is it calculated?  In this article we will discuss about it.

SENSEX is the short form of Sensitive Index.  It is also called as BSE30 as it represents top 30 companies of the Bombay Stock Exchange (BSE). These 30 companies represent different sectors and are chosen on the basis various parameters in which significant importance is given to market capitalization. Currently Sensex have companies like Bajaj Auto, Coal India, HDFC Bank, TCS, Reliance Industries, Maruti etc.

It was first compiled on 1 January 1986 and was calculated on the basis of “Market-Capitalization weighted” methodology. Since 1st September 2003, Sensex is calculated on free-float market capitalization methodology on which majority of global indices is based like Dow Jones, FTSE etc.

Let us see how free-float market capitalization works and how is Sensex calculated.

Free-Float market capitalization

Free-float market capitalization means the total market capitalization of a company based on the shares which are freely available for trade in the market. The shares held by promoters, government and other locked-in shares are excluded in this calculation.

For example, Company X has issued 50,000 shares and current price is 60 Rs. per share. Out of the 50,000 share 17,000 are locked in (promoter holding, government holding etc.).

Total Market Cap of the company = 50,000 * 60 = 30,00,000 Rs.

Market cap available for trading of X = (50,000 – 17,000) * 60 = 19,80,000 Rs.

% Free Float  = 19,80,000/30,00,000 = 66%

Now Free Float Factor will be calculated as per the below table

Sensex

For 66% Free float Factor is 0.70. Hence,

Free Float Market Cap = Total Market Cap * Free float factor = 30,00,000 * 0.70 = 21,00,000 Rs.

Sensex Calculation

Let us consider that two companies A & B constitute Sensex.

Free Float Market Cap of A = 75,00,000 Rs.

Free Float Market Cap of B = 2,50,00,000 Rs.

The Formula for Sensex calculation is

(Sum of free float market capitalization/Base Market Capitalisation) * 100

Base market capitalization is the market cap of the sensex companies in the base year. For Sensex base year is 1978-79.

For our example, let us assume the Base market capitalization as 27,00,000 Rs.

Hence the value = [(75,00,000+2,50,00,000)/27,00,000]*100 = 1203.70

For the calculation of actual Sensex, the base market cap keeps changing to take in account the special event like bonus issue or change of companies in index.

The constitution and calculation of Sensex is very interesting and we hope the article helped you in understanding the same.

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