Know your Index

SENSEX

An index gives the basic idea of the market, whether the prices are going up or are
coming down. So we can say index is an indicator of the market. Sensex is an index
of Bombay stock exchange and gives an idea of the share prices of the companies
listed in BSE. The important thing is that it is not necessary that if the Sensex goes
up, the share price of the companies have gone up. There is a possibility of inverse
relationship but in general an increase in Sensex is interpreted as increase in share
prices.
There is a method of calculating Sensex. Sensex is calculated by free float
capitalization method. Stocks of 30 companies from BSE are taken. There is a
certain criteria for choosing the shares.
According to BSE, any share that dont fall under the follow:

Holding by the founders/directors and acquires who intend to control them

Holding by persons and bodies with controlling interest
Government holding as a promoter or acquirer
Holding through FDI route
Equity held by associate/group companies
Locked-in shares and shares which would not be sold in the open market in
normal course

Market capitalization also termed as market cap is the market value of a companys
outstanding shares. It is calculated by multiplying share price to the number of
shares.
Shares can be divided into two types:
Free float shares and restricted shares. Free float shares are the shares that are free
for trading by anyone while restricted shares are not openly traded. There are some
restrictions and some rule which they have to follow and the sum of the free float
shares and outstanding shares is called float shares. So float shares are the shares
that can be sold and bought.
Now the question arises is why free float and why there are only 30 scrips in
Sensex.
Senses= (Free float market capitalization)/ Index divisor
Index Divisor= (previous day free float market capitalization)/Previous day Sensex
value

The base year for Sensex is 1978-79.

Base value if Sensex is taken as 100.