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
Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.
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Its enlightened …
How is in company A , free float market cap is 1,40,000 ? As it mentions that 300 shares are for general public and market price is 200
So shouldn’t it be 300*200= 60000
Anyways but yes you have written nice and its really helpful but please do check
Hi Harish. Thanks for your comment. There was a typing error which I rectified. I appreciate your help.
Sir, what is the meaning of “A company has 1000 share”? Do they divide their total property (or asset) into 1000 parts? Please let me know, sir.
Thanks
Hi Sir,
Your explanation was very clear and fantastic , However i want to know from where we can find that the nos of promoters share and numbers of free float share (available for public) for a particular company., please let me know.
Once again , Very thankful to provide us a great information.