[Desi Masala] how sensex is calculated
For the premier Bombay Stock Exchange that pioneered
the stock broking activity in India, 128 years of
experience seems to be a proud milestone. A lot has
changed since 1875 when 318 persons became members of
what today is called The Stock Exchange, Mumbai by
paying a princely amount of Re 1.
Since then, the country's capital markets have passed
through both good and bad periods. The journey in the
20th century has not been an easy one. Till the decade
of eighties, there was no scale to measure the ups and
downs in the Indian stock market. The Stock Exchange,
Mumbai in 1986 came out with a stock index that
subsequently became the barometer of the Indian stock
market.
Sensex is not only scientifically designed but also
based on globally accepted construction and review
methodology. First compiled in 1986, Sensex is a
basket of 30 constituent stocks representing a sample
of large, liquid and representative companies.
The base year of Sensex is 1978-79 and the base value
is 100. The index is widely reported in both domestic
and international markets through print as well as
electronic media.
The Index was initially calculated based on the "Full
Market Capitalization" methodology but was shifted to
the free-float methodology with effect from September
1, 2003. The "Free-float Market Capitalization"
methodology of index construction is regarded as an
industry best practice globally. All major index
providers like MSCI, FTSE, STOXX, S&P and Dow Jones
use the Free-float methodology. (See below:
Explanation with an example)
Due to is wide acceptance amongst the Indian
investors; Sensex is regarded to be the pulse of the
Indian stock market. As the oldest index in the
country, it provides the time series data over a
fairly
long period of time (From 1979 onwards). Small wonder,
the Sensex has over the years become one of the most
prominent brands in the country.
The growth of equity markets in India has been
phenomenal in the decade gone by. Right from early
nineties the stock market witnessed heightened
activity in terms of various bull and bear runs. The
Sensex captured all these events in the most judicial
manner. One can identify the booms and busts of the
Indian stock market through Sensex.
Sensex Calculation Methodology
Sensex is calculated using the "Free-float Market
Capitalization" methodology. As per this 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 capitalization
of a company is determined by multiplying the price of
its stock by the number of shares issued by the
company. This market capitalization is further
multiplied by the free-float factor to determine the
free-float market capitalization.
The base period of Sensex is 1978-79 and the base
value is 100 index points. This is often indicated by
the notation 1978-79=100. The calculation of Sensex
involves dividing the Free-float market capitalization
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
Sensex every 15 seconds and disseminated in real time.
Dollex-30
BSE also calculates a dollar-linked version of Sensex
and historical values of this index are available
since its inception.
Understanding Free-float Methodology
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 Index. Free-float market capitalization
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
capitalization 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. Sensex becomes the third index in India to be
based on the globally accepted Free-float Methodology.
____________
Example (provided by rediff.com reader Munish Oberoi):
Suppose the Index consists of only 2 stocks: Stock A
and Stock B.
Suppose company A has 1,000 shares in total, of which
200 are held by the promoters, so that only 800 shares
are available for trading to the general public. These
800 shares are the so-called 'free-floating' shares.
Similarly, company B has 2,000 shares in total, of
which 1,000 are held by the promoters and the rest
1,000 are free-floating.
Now suppose the current market price of stock A is Rs
120. Thus, the 'total' market capitalisation of
company A is Rs 120,000 (1,000 x 120), but its
free-float market capitalisation is Rs 96,000 (800 x
120).
Similarly, suppose the current market price of stock B
is Rs 200. The total market capitalisation of company
B will thus be Rs 400,000 (2,000 x 200), but its
free-float market cap is only Rs 200,000 (1,000 x
200).
So as of today the market capitalisation of the index
(i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs
400,000); while the free-float market capitalisation
of the index is Rs 396,000. (Rs 96,000 + Rs 200,000).
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 capitalisation of the
stocks that comprised the index then was, say, 60,000
(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
60,000 is equal to an index-value of 100.
Thus the value of the index today is = 296,000 x
100/60,000 = 493.33
This is how the Sensex is calculated.
The factor 100/60000 is called index divisor.
____________
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