How to calculate BSE SENSEX?

The Sensex has a very important Iunction. The Sensex is supposed to be an indicator oI 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 oI 30
diIIerent BSE listed companies. It is calculated using the 'Iree-Iloat market capitalization
method. This is a worldwide accepted method as one oI the best methods Ior calculating a
stock market index.

Please note: The method used Ior calculating the Sensex and the 30 companies that are taken
into consideration are changed Irom 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 'Iree-Iloat market capitalization means. (As we said earlier, the Sensex is calculated on
basis oI the 'Iree-Iloat market capitalization method) But, beIore we understand what 'Iree-
Iloat market capitalization means, you Iirst need to understand what 'market capitalization
means.

What is "market capitalization"?

?ou probably Lhlnk LhaL you have never heard of Lhe Lerm markeL caplLallzaLlon" before ?ou have!
When you are Lalklng abouL mldcap" smallcap" and largecap" sLocks you are Lalklng abouL
markeL caplLallzaLlon!

MarkeL cap or markeL caplLallzaLlon ls slmply Lhe worLh of a company ln Lerms of lL's shares! 1o puL
lL ln a slmple way lf you were Lo buy all Lhe shares of a parLlcular company whaL ls Lhe amounL you
would have Lo pay? 1haL amounL ls called Lhe markeL caplLallzaLlon"!

1o calculaLe Lhe markeL cap of a parLlcular company slmply mulLlply Lhe currenL share prlce" by Lhe
number of shares lssued by Lhe company"!

uependlng on Lhe value of Lhe markeL cap Lhe company wlll elLher be a mldcap" or largecap" or
smallcap" company! Pavlng seen whaL markeL cap ls and how Lo flnd ouL Lhe markeL cap of a
parLlcular company leL us Lry Lo undersLand Lhe concepL of freefloaL markeL cap"

What is "free-float market capitalization"?
any diIIerent types oI investors hold the shares oI a company! The Govt. may hold some oI
the shares. Some oI the shares may be held by the 'Iounders or 'directors oI the company.
Some oI the shares may be held by the FDI`s etc. etc!

Now, only the 'open market shares that are Iree Ior trading by anyone are called the 'Iree-
Iloat shares. When we are calculating the Sensex, we are interested in these 'Iree-Iloat
shares!

A particular company may have certain shares in the open market and certain shares that are
not available Ior trading in the open market.

According the BSE, any shares that DO NOT Iall under the Iollowing criteria, can be
considered to be open market shares:
O oldings by Iounders/directors/ acquirers which has control element
O oldings by persons/ bodies with "controlling interest"
O Government holding as promoter/acquirer
O oldings through the FDI Route
O Strategic stakes by private corporate bodies/ individuals
O Equity held by associate/group companies (cross-holdings)
O Equity held by employee welIare trusts
O ocked-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 oI the company`s
shares to the BSE. On the basis oI this, the BSE will decide the 'Iree-Iloat Iactor oI the
company. The 'Iree-Iloat Iactor is a very valuable number! II you multiply the "Iree-Iloat
Iactor" with the 'market cap oI that company, you will get the 'Iree-Iloat market cap which
is the value oI the shares oI the company in the open market!
Free-fIoat Bands:
Free-FIoat Free-FIoat Factor Free-FIoat Free-FIoat Factor
>0 - 5% 0.05 >50 - 55% 0.55
>5 - 10% 0.10 >55 - 60% 0.60
>10 - 15% 0.15 >60 - 65% 0.65
>15 - 20% 0.20 >65 - 70% 0.70
>20 - 25% 0.25 >70 - 75% 0.75
>25 - 30% 0.30 >75 - 80% 0.80
>30 - 35% 0.35 >80 - 85% 0.85
>35 - 40% 0.40 >85 - 90% 0.90
>40 - 45% 0.45 >90 - 95% 0.95
>45 - 50% 0.50 >95 - 100% 1.00

So, having understood what the 'Iree Iloat market cap is, now what? ow do you Iind out
the value oI the Sensex at a particular point? Well, it`s pretty simple..
First: Find out the 'Iree-Iloat market cap oI all the 30 companies that make up the Sensex!

Second: Add all the 'Iree-Iloat market cap`s oI all the 30 companies!

Third: ake all this relative to the Sensex base. The value you get is the Sensex value!

The 'third step probably conIused you. Think oI it this way:

Suppose, Ior a 'Iree-Iloat market cap oI Rs.100,000 Cr... the Sensex value is 4000.
Then, Ior a 'Iree-Iloat market cap oI Rs.150,000 Cr... the Sensex value will be..

So, the Sensex value will be 6000 iI the 'Iree-Iloat market cap comes to Rs.150,000 Cr!

Please Note: Every time one oI 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 leIt 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 Irom time to time by an
'index committee. This 'index committee is made up oI academicians, mutual Iund
managers, Iinance journalists, independent governing board members and other participants
in the Iinancial markets.