ga('create', 'UA-90118074-1', 'auto'); ga('send', 'pageview');

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