Everything About Sensex

What is Sensex?

Sensex is the short form of Sensitive Index; the benchmark index of Bombay Stock Exchange. It is also called the "Barometer" of Indian economy as it tracks the ups and downs in the economy. 

BSE comprises 30 stocksof the Indian economy. The list of those 30 companies is given below. The stocks are selected from diverse sectors of the market like software, banking, manufacturing, auto, heavy industries, infrastructurebased on certain criteria. They are as follows:

• Listing history
•  Trading history
•  Rank based on the market cap (should be among the top 100)
•  Market capitalization weight
•  Industry / sector they belong to
•  Historical record

Some of the prominent stocks listed on the BSE as of now are-:

Company Name	Industry/Sector
ACC	Cement – Major
BhartiAirtel	Telecommunications - Service
BHEL	Engineering – Heavy
DLF	Construction & Contracting - Real Estate
HDFC Bank	Banks - Private Sector
ICICI Bank	Banks - Private Sector
Infosys	Computers – Software

How Sensex is calculated?

Sensex is calculated the using the “Free-float market capitalization” methodology.

The formula for calculating the SENSEX=

 (Sum of free float market capital of 30 benchmark stocks)* Index factor

Index factor= (100/ market capital value in 1978-79)

           

            1978-79 is taken as the base year for calculating the SENSEX. If the SENSEX on a particular day is 19000, then it means that on that particular day, SENSEX closed at 190 times the index value in 1978-79.

Why free float market capitalization method?

·        It depicts the movement in the market more rationally
·        It removes the influence of government or promoter on the price of stocks
·        Almost all indices are calculated by this methodology
·        It gives a more authentic information for benchmark comparisons

 What is free float market capitalization?

In an listed Company, some part of the shares of the company are held by founders of the companies ( also known as Promoters), these shares cannot traded by the common people in the open market.The rest of the shares which can be traded in the open market are called “Open-Market” shares.

The market capitalization of these shares is called “Free float market capitalization”. (Market capitalization of a company = number of shares in the market *price of each share.)

For easy understanding, let us imagine a hypothetical scenario in where there are only two companies in the market.

·        Company A: owned by X and

·        Company B: owned by Y.

Let the total number of shares in Co. A be 5000. Out of these 5000 shares, “Founder” of the Company X owns 2000 shares. So, the free float shares are 5000-2000=3000.

Assume that price of each share is Rs 50.

So, the total market capitalization of company A is = (5000*50)=Rs 2,50,000&

Free float market capitalization of company A is =(3000*50) = Rs 1,50,000

The same process is used for company B where there are a total 4000 shares and from those 4000 shares Y owns 1000 shares and  thus , the remaining 4000-1000=3000 are free float shares. Assume that the price of each share is 40 Rs. Then,

Total market capitalization of company B is = (4000*40) = 160000 Rs.

Free float market capitalization is =( 3000 *40) = 120000 Rs.

So the total “Free-Float market capitalization” of the entire market is

=(Free-float market capitalization of Company A)     = 150000

   + (Free-float market capitalization of Company B) = 120000

                                                                               -----------

                                                                               270000

                                                                               ------------

The year 1978-79 is considered the base year of the index with a value set to 100.

The explanation for the above is that suppose in 1978-79, the total free float market capitalization of the entire market was 20,000 then we assume that it is equal to 100 points.

So the value of index today is = ( 2,70,000* 100/20000) = 1350 points.