How the Sensex is Calculated - Rediff.com Business

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w the Sensex is calculated - Rediff.com Business

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ediff.com Business How the Sensex is calculated

How the Sensex is calculated

ast updated on: February 21, 2008 12:57 IST

For the premier Bombay Stock Exchange that pioneered the stock broking activity in India,28 years of experience seems to be a proud milestone. A lot has changed since 1875 when

18 persons became members of what today is called The Stock Exchange, Mumbai by paying

princely amount of Re 1.

ince then, the country's capital markets have passed through both good and bad periods.

he journey in the 20th century has not been an easy one. Till the decade of eighties, there

was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange,

Mumbai in 1986 came out with a stock index that subsequently became the barometer of the

ndian stock market.

ensex is not only scientifically designed but also based on globally accepted construction

nd review methodology. First compiled in 1986, Sensex is a basket of 30 constituent stocks

epresenting a sample of large, liquid and representative companies.

he base year of Sensex is 1978-79 and the base value is 100. The index is widely reported in

oth domestic and international markets through print as well as electronic media.

he Index was initially calculated based on the "Full Market Capitalization" methodology but

was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float

Market Capitalization" methodology of index construction is regarded as an industry best

ractice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones

se the Free-float methodology. (See below: Explanation with an example)

Due to is wide acceptance amongst the Indian investors; Sensex is regarded to be the pulse of

he Indian stock market. As the oldest index in the country, it provides the time series dataver a fairly long period of time (From 1979 onwards). Small wonder, the Sensex has over the

ears become one of the most prominent brands in the country.

he growth of equity markets in India has been phenomenal in the decade gone by. Right

rom early nineties the stock market witnessed heightened activity in terms of various bull

nd bear runs. The Sensex captured all these events in the most judicial manner. One can

dentify the booms and busts of the Indian stock market through Sensex.

ensex Calculation Methodology

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ensex is calculated using the "Free-float Market Capitalization" methodology. As per this

methodology, the level of index at any point of time reflects the Free-float market value of 30

omponent stocks relative to a base period. The market capitalization of a company is

etermined by multiplying the price of its stock by the number of shares issued by the

ompany. This market capitalization is further multiplied by the free-float factor to

etermine the free-float market capitalization.

he base period of Sensex is 1978-79 and the base value is 100 index points. This is often

ndicated by the notation 1978-79=100. The calculation of Sensex involves dividing the Free-oat market capitalization of 30 companies in the Index by a number called the Index

Divisor.

he Divisor is the only link to the original base period value of the Sensex. It keeps the Index

omparable over time and is the adjustment point for all Index adjustments arising out of

orporate actions, replacement of scrips etc. During market hours, prices of the index scrips,

t which latest trades are executed, are used by the trading system to calculate Sensex every

5 seconds and disseminated in real time.

Dollex-30

SE also calculates a dollar-linked version of Sensex and historical values of this index are

vailable since its inception.

Understanding Free-float Methodology

ree-float Methodology refers to an index construction methodology that takes into

onsideration only the free-float market capitalisation of a company for the purpose of index

alculation and assigning weight to stocks in Index. Free-float market capitalization is

efined as that proportion of total shares issued by the company that are readily available for

rading in the market.

t generally excludes promoters' holding, government holding, strategic holding and other

ocked-in shares that will not come to the market for trading in the normal course. In other

words, the market capitalization of each company in a Free-float index is reduced to the

xtent of its readily available shares in the market.

n India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and

ankex in June 2003. While BSE TECk Index is a TMT benchmark, Bankex is positioned as

benchmark for the banking sector stocks. Sensex becomes the third index in India to be

ased on the globally accepted Free-float Methodology.

Example (provided by rediff.com reader Munish Oberoi):

uppose the Index consists of only 2 stocks: Stock A and Stock B.

uppose company A has 1,000 shares in total, of which 200 are held by the promoters, so

hat only 800 shares are available for trading to the general public. These 800 shares are the

o-called 'free-floating' shares.

imilarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters

nd the rest 1,000 are free-floating.

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