Sensex Meaning - Know What is Sensex & How is it Calculated
For an investor it is very important to know the basic terminologies like Sensex meaning, what is Sensex, how the calculation are done.
Therefore, let us learn and understand about it here.
The term Sensex was named by a stock market analyst Mr. Deepak Mohoni, the word is a portmanteau of Sensitive and Index. The Sensex is primarily an index which reflects the Bombay Stock Exchange (BSE) which got established in 1875. Till Jan1, 1986 the stock exchange did not have any official index. This was the time when Sensex was opted for gauging the performance of the Indian market. The Sensex comprises of 30 prominent stocks which are derived from sectors and are traded actively in the exchange market. Sensex truly reflects the Indian stock market movement. If the Sensex value increases it means that there is a general increase in the prices of shares whereas, if the Sensex decreases it means there is a general decrease in the price of shares.
You can identify the booms and busts going in the stock market through S&P BSE Sensex. From Feb 19, 2013, BSE and S&P Dow Jones Indices entered into an alliance to calculate Sensex. Nifty is the other index calculated in India for the National Stock Exchange.
Sensex comprises of the 30 largest and most actively traded stocks on BSE, providing a gauge of India’s economy. The Sensex is one of the oldest stock indexes in India. Sensex is used to observe the overall growth, development of particular industries, ups and downs of the Indian economy by the investors.
Calculation Methodology for Sensex
Historically Sensex used the weighted market capitalization methodology, but from September 1, 2003, it shifted to Free Float Market Capitalization methodology. All the major indices in the world use the same methodology. The performance of the 30 selected key stocks directly reflects the level of the index.
Free-Float Market Capitalization = Market Capitalization * Free Float Factor
Now let’s see what is referred to as the Free Float Factor?
Free Float is referred to as that % of the total shares issued by the company that is readily available for trading in the market. It excludes the shares that are held by the promoters, government, etc.
To understand better let’s look at an example: If the company has 100 shares, in which 30 are held by the government or the promoters and the remaining 70 are available for trading to general public then, those 70 shares are the free-floating shares and thus the free float factor will be 70%. Whereas the word market capitalization represents the valuation of the company. Market capitalization is determined by multiplying the price of a stock with the number of shares issued by that company.
Hope till now you have learnt about what is Sensex meaning, its methodology; now let’s look how Sensex is calculated. The above two terminologies play a major role while calculating Sensex.
How Sensex is calculated?
- The Sensex comprises of the 30 stocks which are selected according to the criteria set.
- The Market Capitalizations of all the 30 companies are determined.
- The Free Float Market Capitalization of all the 30 companies is determined.
- Of all the 30 companies the Free Float Market Capitalization is summed up to get a total of all the Free Float Market Capitalization.
- As the formula of Sensex= (total free float market capitalization/ Base market capitalization) * Base index value.
- The base year to calculate Sensex is 1978-79, the base value is static but it has to be changed. According to BSE Rs. 2501.24 crore is to be used as the base market capitalization.
- The base index value is 100.
Sensex= free float market capitalization of 30 selected companies /25041.24 crores* 100
(The free float market capitalization of 30 selected companies are added and which get divided by 2501.24 crores and multiplied by 100.)