How is the Sensex calculated?
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K.Karthik Raja
Jul 10, 2008, 6:30:20 AM7/10/08
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How is the Sensex 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.
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.
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.
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.
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