How to calculate BSE SENSEX?

Requested by: Lt Col Ashis Kumar

Mishra

This article explains how the value of the “BSE

Sensex” or “sensitive index” is calculated. If

you are not sure what we mean by the Sensex

or what the Sensex is all about, you can find

this out by reading our “How to make money in

the stock market?” article.

The Sensex has a very important function. The

Sensex is supposed to be an indicator of the

stocks in the BSE. It is supposed to show

whether the stocks are generally going up, or

generally going down.

To show this accurately, the Sensex is

calculated taking into consideration stock

prices of 30 different BSE listed companies. It

is calculated using the “free-float market

capitalization” method. This is a world wide

accepted method as one of the best methods

for calculating a stock market index.

Please note: The method used for calculating

the Sensex and the 30 companies that are

 taken into consideration are changed from time

to time. This is done to make the Sensex an

accurate index and so that it represents the

BSE stocks properly.

To really understand how the Sensex is

calculated, you simply need to understand

what the term “free-float market

capitalization” means. (As we said earlier, the

Sensex is calculated on basis of the “free-float

market capitalization” method) But, before we

understand what “free-float market

capitalization” means, you first need to

understand what “market capitalization”

means.
What is "market capitalization"?

You probably think that you have never heard

of the term “market capitalization” before. You

have! When you are talking about “mid-cap”,

“small-cap” and “large-cap” stocks, you are

talking about market capitalization!

Market cap or market capitalization is simply

the worth of a company in terms of it’s shares!

To put it in a simple way, if you were to buy all

 the shares of a particular company, what is the

amount you would have to pay? That amount is

called the “market capitalization”!

To calculate the market cap of a particular

company, simply multiply the “current share

price” by the “number of shares issued by the

company”! Just to give you an idea, ONGC, has

a market cap of “Rs.170,705.21 Cr” (when this

article was written)

Depending on the value of the market cap, the

company will either be a “mid-cap” or “large-

cap” or “small-cap” company! Now the

question is, how do YOU calculate the market

cap of a particular company? You don’t! Just go

to a website like MoneyControl.com and look up

the company whose market cap you are

interested in finding out! The figure in front of

“Mkt. Cap” will be the market cap value.

Having seen what market cap is and how to

find out the market cap of a particular

company, let us try to understand the concept

of “free-float market cap”

What is "free-float market capitalization"?
Many different types of investors hold the

shares of a company! The Govt. may hold some

of the shares. Some of the shares may be held

by the “founders” or “directors” of the

company. Some of the shares may be held by

the FDI’s etc. etc!

Now, only the “open market” shares that are

free for trading by anyone, are called the “free-

float” shares. When we are calculating the

Sensex, we are interested in these “free-float”

shares!

A particular company, may have certain shares

in the open market and certain shares that are

not available for trading in the open market.

According the BSE, any shares that DO NOT fall

under the following criteria, can be considered

to be open market shares:

• Holdings by founders/directors/

acquirers which has control element

• Holdings by persons/ bodies with

"controlling interest"

• Government holding as

promoter/acquirer
 • Holdings through the FDI Route

• Strategic stakes by private

corporate bodies/ individuals

• Equity held by associate/group

companies (cross-holdings)

• Equity held by employee welfare

trusts

• Locked-in shares and shares which

would not be sold in the open market in

normal course.

A company has to submit a complete report

about “who has how many of the company’s

shares” to the BSE. On the basis of this, the

BSE will decide the “free-float factor” of the

company. The “free-float factor” is a very

valuable number! If you multiply the "free-float

factor" with the “market cap” of that company,

you will get the “free-float market cap” which

is the value of the shares of the company in the

open market!

A simple way to understand the “free-float

market cap” would be, the total cost of buying

all the shares in the open market!

So, having understood what the “free float

market cap” is, now what? How do you find out

the value of the Sensex at a particular point?

Well, it’s pretty simple….

First: Find out the “free-float market cap” of all

the 30 companies that make up the Sensex!

Second: Add all the “free-float market cap’s” of

all the 30 companies!

Third: Make all this relative to the Sensex base.

The value you get is the Sensex value!

The “third” step probably confused you. To

understand it, you will need to understand

“ratios and proportions” from 5th standard

mathematics. Think of it this way:

Suppose, for a “free-float market cap” of

Rs.100,000 Cr... the Sensex value is 4000…

Then, for a “free-float market cap” of

Rs.150,000 Cr... the Sensex value will be..

So, the Sensex value will be 6000 if the “free-

float market cap” comes to Rs.150,000 Cr!

Please Note: Every time one of the 30

companies has a “stock split” or a "bonus" etc.

appropriate changes are made in the “market

cap” calculations.

Now, there is only one question left to be

answered, which 30 companies, why those 30

companies, why no other companies?

The 30 companies that make up the Sensex are

selected and reviewed from time to time by an

“index committee”. This “index committee” is

made up of academicians, mutual fund

managers, finance journalists, independent

governing board members and other

participants in the financial markets.

The main criteria for selecting the

30 stocks is as follows:

Market capitalization: The company should

have a market capitalization in the Top 100

market capitalization’s of the BSE. Also the

market capitalization of each company should

be more than 0.5% of the total market

capitalization of the Index.

Trading frequency: The company to be included

should have been traded on each and every

trading day for the last one year. Exceptions

can be made for extreme reasons like share

suspension etc.

Number of trades: The scrip should be among

the top 150 companies listed by average

number of trades per day for the last one year.

Industry representation: The companies should

be leaders in their industry group.

Listed history: The companies should have a

listing history of at least one year on BSE.

Track record: In the opinion of the index

committee, the company should have an

acceptable track record.

Having understood all this, you now know how

the Sensex is calculated.

Jai Hind.