How is SENSEX calculated?

In my previous article we had a detailed discussion about what is a SENSEX. Now let us discuss as to how exactly is the value of SENSEX calculated. The method that is used for the calculation of SENSEX is regarded as the industry’s best practice not only within the boundaries of the country, but globally.

SENSEX is calculated using the Free Float Market Capitalization Methodology. Under the free float market capitalization, that proportion of total shares issued by the company is considered, which are readily available for trading in the market, which is the free float shares. This means that, for the calculation of SENSEX, the restricted stocks are excluded. The restricted stocks include, like those shares held by the company insiders, promoters, employees, etc., that are not readily available for trading in the market.

The use of FREE FLOAT MARKET CAPITALIZATION methodology for calculating the value of SENSEX is explained as the following steps:

Step 1- Calculation of market capitalization by using the formula-

Market Capitalization= Price of Stock * No. of shares issued

Step 2- Calculation of free float factor.

Free float factor is the percentage of free float shares of a particular company.

Step 3- Calculation of Free Float Market Capitalization.

Free Float Market Capitalization= market capitalization*free float factor

(Before going on with the final step, it is important to know two component values-

1. The base year taken for calculation of SENSEX is 1978-79;

2. The base index value taken for calculation of SENSEX is 100 points.)

Step 4- Calculation of SENSEX.

SENSEX= Free float market capitalization/ Index divisor

*Index Divisor is the original base period value of SENSEX.

Thus, the level of index, at any point of time, reflects the free float market value of 30 stocks included in it, relative to a base period.

Click here for government certification in Accounting, Banking & Finance