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What is Sensex? How it is calculated? How is the effect of each share on Sensex calculated?

In India, We have two mainly Stock exchange. BSE ( BOMBAY STOCK EXCHANGE ) and National Stock Exchange ( NSE). The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. The index of the BSE is called as Sensex and the index of NSE is called Nifty. The Sensex and Nifty are the stock market index.

The difference between BSE and NSE is they both are completely different stock exchanges. Sensex has 30 stock companies under it. These 30 are well-established companies listed on the Bombay Stock Exchange (BSE). Nifty has 50 well-established companies on the National Stock Exchange(NSE). Sensex and nifty50 are the Indian stock market prominent. Sensex and nifty50 are the Indian stock market prominent. Basically, these are indexes which act as barometers of the stock market.

Understanding Free-Float Market Capitalization:

Sensex was calculated based on a method called Full Market Capitalization. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.

Free float market capitalization is equal to (current market price of the stock) * (total number of shares available for public for trading).

I will try to explain with an example:

suppose there are only two companies in the market- Company X and company Y.

X 250 shares out of which 200 are available for the general public (called free-floating shares) and 50 are owned by company management. Each share is valued at Rs 200.

Now the total company value is = total no of shares * each share value = 250*200 = Rs 50,000.

This is called the total market capitalization of X.

Free float market capitalisation of X= Free floating shares* share value = 200*200 = Rs 40,000

Similarly, For company Y, say free-floating shares are 150 and free float market capitalization is Rs 60,000. while the free-float market capitalization of the index is Rs 1 lakh rupees (sum of X&Y).

The year 1978-79 is considered the base year of the index with a value set to 100. We said that this amount of ten thousand is equivalent to 100 Sensex points. This is called Base Index (On the very first day BSE started indexing, Sensex was 100. The base index was made 100 just for ease of calculations.) market share is 1 lakh. If 10,000 is equivalent to 100 Sensex points then 1 Lakh is equivalent to 1000 Sensex points. Now free-float market capitalization is Rs 110000. So Sensex is 1100 points.

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Sunday, 17 November 2019

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