The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies into an index, known as an indexing device. The only connection is the base period of the Divisor Sensex.
The whole country suffers from the rise and fall of the SENSEX, whether individuals are directly or indirectly connected to it. With the increased financial activity of the country, the SENSEX has become a family term that is closely followed by millions of people every day. But very few people are aware of the methodology used to calculate the SENSEX.
The SENSEX is primarily the Bombay Stock Exchange (BSE) reflective index. Formed in 1875, the stock exchange had no formal index until January 1, 1986, when the SENSEX was introduced to measure the efficiency of the Indian markets. The National Stock Exchange (NSE), another primary index of India, is the barometer of the Nifty. The SENSEX consists of 30 significant stocks from all major industries which are actively traded on the exchange. Thus the SENSEX represents the momentum of the Indian stock market.
Calculation Methodology for SENSEX
Like other critical economic indexes in the world, the SENSEX also shifted the method of ‘free-float market capitalization’ with effect from 1 September 2003 to determine its numbers. The indexed amount directly reflects the market performance of 30 picked the main stock.
Free-float market capitalization is defined as the percentage of total company issued shares, easily accessible for trading in the market. This usually prevents promoters, public holdings, strategic holdings and other locked-in stocks, which will not enter the market for trading in the normal course. So, free-float market capitalization is the share of total shares accessible to the general public for trading.
The following steps are used to calculate the SENSEX:
The market capitalization of each of the 30 companies included in the index is first determined by multiplying their stock prices by the number of shares issued by that company.
To obtain free-float market capitalization, market capitalization is multiplied by the free-float factor. (The company’s free-float factor is multiple with which the company’s total market capitalization is adjusted to reach its free-float market capitalization. The BSE is determined based on data submitted by firms. The free-float factors the price is between 0.05 and 1.00. A free-float factor of 0.55 means that the firm determines only 55 pct of the market capitalization factor.)
The free-float market capitalization of the index component is then divided by a number called the index divider. This divider index is the only connection to the initial base period value of the index. (For SENSEX, the base price period is 1978–79) This gives the value index to compare over time.
Note: According to this methodology, the index level represents the free-float market value of 30 component shares relative to the base period at any level. The market capitalization of a company is determined by the number of shares issued by the firm multiplying the cost of the stock.