How to Calculate SENSEX - BSE / NSE ~ Stay Updated

Every day, we here in news that SENSEX (either BSE/NSE ) is up / down by some points. How can it be decided by how many points it moved up/ down is not known to many of us. Right from the beginning days of i.e 137 years ago in the year of 1875 when the Bombay Stock Exchange (BSE) has started a lot of changes took place in the country’s economy. Along with economy, the Capital Markets also started to
grow and today there are around 23 Stock Exchanges in India. BSE and NSE are the major ones among all those and well known to all. SENSEX is based on globally accepted Construction and Review Methodology. BSE SENSEX is based on the top 30 stocks representing a sample of large, liquid and representative companies where as NSE is based on the top 50 stocks.

SENSEX is calculated using a methodology called “Free-Float Methodology” or the “Free-Float Market Capitalization Methodology”. This methodology is used by all the major indexes like MSCI, FTSE, S&P, Dow Jones e.t.c. Before going into the methodology there are some terms which we need to understand.

Base Year: This is the year which is taken as the reference year for comparison. For BSE it is 1978-79 and for NSE it is 1995

Base Value: This is the reference value of the SENSEX in the base year. For BSE it is set to 100 points and for NSE it is 1000 points.

Market Capitalization: This is the total value of the company. It is determined by multiplying the number of shares issued by the stock price on that day.

Free Float Market Capitalization: Free-float market capitalization is the proportion of total shares issued by the company and that are readily available for trading in the market in the total issues shares (i.e. excluding the shares held by promoters).

The Methodology of Free Float Market Capitalization

It takes into consideration only the free-float market capitalization of a company for index calculation and assigning weight to stocks in the Index. The market capitalization is multiplied by the free-float factor to determine the free-float market capitalization. The calculation of SENSEX is done by dividing the Free-float market capitalization of the 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and it acts as the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrip’s etc.

Let’s consider an example to understand this. Assume 3 companies A, B and C are only in the INDEX. A has 100 shares (current stock price 100 each) in total of which 30 are held by promoters, and B has 150 shares (current stock price 100 each), 50 held by promoters and C has 200 shares (current stock price 100 each), 40 held by promoters.

Now the respective Market Capitalizations are A – 100X100 = 10,000 similarly B – 15000 and C- 20000

But, the free float Capitalization will be

For A (100 - shares held by promoters) x Share price = (100-30) x 100 = 7000, similarly for B it is 10000 and for C it will be 16000

As of today, the respective market capitalization of the INDEX is 45000 (10000+20000+15000) and free float capitalization will be 33000 (7000+10000+16000).

As we already mentioned, the year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalization of the stocks that comprised the index then was, say, 8000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 8000 is equal to an index-value of 100.

Therefore the value of Index today will be calculated as

If 8,000 = 100 then how much is 33000 equal to? i.e. (33000 x 100) / 8000 = 412.5. This is compared with the earlier days INDEX and thereby up/ down movement is determined. (The factor 100/8000 is called index divisor)