How is the Sensex calculated? The Sensex , an abbreviation of the BSE sensitive index, is a market capitalisation-weighted index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors.
The index is widely used to measure the performance of the Indian stock markets. Sensex is considered to be the pulse of the Indian stock markets as it represents the underlying universe of listed stocks on The Stock Exchange, Mumbai. Further, as the oldest index of the Indian stock market, it provides time series data over a fairly long period of time (since 1978-79).
Sensex is not only scientifically designed but also based on globally accepted construction and review methodology.
Sensex Calculation Methodology
As per the methodology, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalisation of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalisation is further multiplied by the free-float factor to determine the free-float market capitalisation.
The base period of Sensex is 1978-79, and the base value is 100 points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the free-float market capitalisation of 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 is the adjustment point for all index adjustments arising out of corporate actions, replacement of scrips etc.
During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate the Sensex every 15 seconds and disseminated in real time.
Understanding Free-float Methodology
Concept: Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in the index.
Free-float market capitalisation is defined as that proportion of total shares issued by the company that are readily available for trading in the market.
It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalisation of each company in a free-float index is reduced to the extent of its readily available shares in the market.
In India, BSE pioneered the concept of free-float by launching BSE TECk in July 2001 and BANKEX in June 2003. While BSE TECk Index is a TMT benchmark, BANKEX is positioned as a benchmark for the banking sector stocks.
Definition of Free-float: Shares held by investors that would not, in the normal course, come into the open market for trading are treated as 'Controlling/ Strategic Holdings', and hence not included in free-float. In specific, the following categories of holding are generally excluded from the definition of free-float:
- Holdings by founders/directors/ acquirers which has control element
- Holdings by persons/ bodies with "Controlling Interest"
- Government holding as promoter/acquirer
- Holdings through the FDI Route
- Strategic stakes by private corporate bodies/ individuals
- Equity held by associate/group companies (cross-holdings)
- Equity held by Employee Welfare Trusts
Locked-in shares and shares which would not be sold in the open market in normal course. The remaining shareholders would fall under the free-float category.
