## How is Sensex calculated?

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How is Sensex calculated? Sensex, also called BSE 30, is the market index consisting of 30 well-established and financially sound companies listed on Bombay Stock Exchange (BSE).

The methodology used for calculating SENSEX is quite interesting. It is calculated using the ‘Free-float Market Capitalization’ method.

### Free-float Market Capitalization:

It is defined as that proportion of the total shares issued by the company that is readily available for trading in the market. It excludes promoter’s holding.

For example, suppose a company has 1000 shares in total. Out of this, 300 shares are held for the promoters. Hence, only 700 shares are available to the general public for trading. These 700 shares are called the ‘free-floating shares’

Suppose the price of each share is Rs 200.

Then, total market capitalization = 1000 Shares * Rs 200 = Rs 2,00,000

Free float market capitalization = 700 shares * Rs 200 = Rs 1,40,000

Now, for calculating the index, suppose the index consists of two stocks. Stock A and Stock B.

 Details Company A Company B Total Shares 1000 2000 Public holding 700 1000 Promoter’s holding 300 1000 Current Market price 200 300 Total market capitalization 2,00,000 6,00,000 Free float market capitalization 1,40,000 3,00,000
• As of today, total free float market capitalization (of A & B) = 1,40,000 + 3,00,000 = 4,40,000
• The year 1978-79 is considered as the base year of the index with a value set to 100.
• Suppose at that time (1978-79), the total free float market capitalization of the stock was said 11,000.

By using simple maths,

 Today Free-float Market Cap Index-Value 1978-79 11,000 100 Today 4,40,000 X

X = (100/11000) * 440000 = 4,000

• Thus, the value of index today is 4000.
• THIS IS HOW SENSEX IS CALCULATED.
• The factor (100/11000) is called index divisor.
 Index Formula: INDEX = Base * (Current market capitalization/ Base market capitalization)

Here, is the Sensex from 1991 to 2013. Note, the dip at 2008-09 during the great Indian recession.

If you are new to Indian stock market, I will highly recommend you to read this book: How to Avoid Loss and Earn Consistently in the Stock Market: An Easy-To-Understand and Practical Guide for Every Investor by Prasenjit Paul

## What are stocks? And what is a Stock Market?

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 What are stocks? What is a stock market? What is Bombay stock exchange (BSE)? What is National stock exchange (NSE)? What is Sensex? What is Nifty? What is meant be Sensex/Nifty is up or down? How does upward or downward movement of Sensex/Nifty affect the growth of the country? What is bull and bear market?

These are the major questions which are repeatedly asked by the common people of India whenever they hear the financial news of the television or the newspapers or magazines. Although a simple definition of all the above terms can be found easily in a book or internet, it would be simpler and more interesting if we explain the whole scenario in the story form. Later, we will give the standard definition for all the above terms for your better understanding.

 It all starts with a company. Let’s say there is a company X. It is a manufacturing company and is doing well in its sector. Now it wants to expand by doing some project or research and development(R&D) in his field. For this company requires capital (money).  At first, the company will try to get the capital from all the owners to expand the company. Further, when the owners aren’t able to meet the capital needs, it will go the biggest money source, the banks. But this will only increase his debts along with the interests. So, what options the company X has now? Where can the company X get such a large capital from? The answer is public. The company can collect a large sum of money by giving a little ownership of the company to the public.  And here begins the journey of the company in the stock market. A stock market (ex BSE, NSE) is a place where the company will be able to present his ownership (in the form of the stocks) to the public. And why will the people buy the stocks of the company X? It totally depends on how positive the people is about the growth of the company in terms of sales, earnings, revenue etc. If the people think that the company will be able to grow to new heights, or if the people believe in the visions of the company X, then, they will buy the stocks to trade their money with the ownership of the company.  Thus by giving the portion of the ownership, the company is able to pool a great amount of money for its growth and development. Generally, the company does not offer its complete shares to the public. Almost all of the times the owners (promoters) keep a portion of the stock with them to keep the ownership in their hands. For example, let’s say the company X decided to provide 10,00,000 shares. Out of the total, it decides to offer 7,00,000 shares to the public and remaining 3,00,000 shares with them. Here, the promoters share will be 30%.  {We would also like to define the term free-float market capitalization here. It is the product of the total shares offered to the public and the price of per equity share. Let’s say the company X each share price costs Rs 50 and it offers 7,00,000 public shares. Then, the free float market capitalization here will be equal to 50*7,00,000. The total market capitalization (not-free float) will be 50*10,00,000}.  Now that the company X has decided to enter the stock market. When, the first time the company enters the market, it has to provide an offering price for the shares. This is called initial public offering i.e. IPO (we will discuss IPO in details in later sections). The IPO is offered in the primary market, where the seller is the company and the buyer is the public.  After the IPO, the stock goes to the secondary market, where the buyer and sellers both are the public. Here, the public generally exchanges the ownership of the company.

That’s the story of the stock and the company X. In the next section, we will discuss the two stock markets in India i.e. Bombay stock exchange (BSE) and National stock exchange (NSE) and their indexes (Sensex/Nifty).

If you want to learn Indian Stock market from scratch, I will highly recommend you to read this book: Bulls, Bears and Other Beasts: A Story of the Indian Stock Market by Santosh Nair

## What are stocks? What is a stock market? -Summary

Stock:  A stock is a general term used to describe the ownership of any company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Shares, equity, or stock, all basically means the same thing.

Stock Market: The stock market is the market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. It is a place where shares of publicly listed companies are traded.

The stock market can be split into two main sections: the primary market and the secondary market.

• Primary Market: It’s where new issues are first sold through initial public offerings. Retail Investors, mutual funds, domestical and foreign institutional investors buy the share from the promoters. Institutional investors typically purchase most of these shares during this first-time issue by the company.
• Secondary Market: All subsequent trading goes on in the secondary market where participants include both institutional and individual investors.

Initial Public Offering (IPO): An IPO is the first time that the stock of a private company is offered to the public. It is a source of collecting money from the public for the first time in the market to fund its projects. In return, the company gives the share to the investors in the company. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.

Market Capitalization: Market Cap or Market capitalization refers the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures.