How Sensex is calculated?

How Sensex is calculated?
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You all might have found many people talking about the stock market these days. Even you might have listened to people talking about Sensex points which sometimes go up or down. Sensex acts as the benchmark which is also known as the Bombay Stock Exchange Sensex index. Any movement on the Sensex causes a lot of up and down in the Indian stock market.

Bombay stock exchange was established in the year 1875 and is located in Mumbai. It was Asia’s first and the fastest stock exchange. Even it was the first stock exchange of India. BSE provides certain regulations to all the investors that will help in keeping the trading process transparent in almost all financial commodities. It is playing the most important role in the Indian capital market so their index i.e. Sensex will also play a great role.

Sensex was an index introduced by the Stock market analyst Mr. Deepak Mohoni. This index reflects the working of the top 30 largest and the most active companies stocks. There is a set criterion to select the stocks. It is discussed as below:

  • The stock should be listed on the Bombay Stock Exchange (BSE).
  • The stock should range from large to mega-cap stock.
  • All the revenue generated should be from core activities.
  • The company must have liquid stocks.
  • There should be balanced and diversified sector involvement in a line that too with the support of the Indian equity market.

The movement of Sensex will reflect the overall working of the Indian stock market. If it increases, that means the stock prices are increasing of the 30 companies. If it is decreasing that means the value of the top 30 companies’ stock prices is decreasing. So the current position of Sensex can be used to understand the growth and development in different industries.

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For the calculation of Sensex value, the Free Float Market Capitalization method is used. In the earlier days, the weight market capitalization method was used. But after September 1, 2003, the free-float market capitalization method is only used. For the exact value, the top 30 company stocks are calculated according to the above-given selection procedure. After that free-float market capitalization is calculated i.e.

FreeFloat Market Capitalization = Market Capitalization * Free-Float factor

Here free-float factor is the total shares ready to be issued in the market. After this market capitalization is calculated which is the market value of the company.

Market Capitalization = Share price per share * Number of shares issued by the company.

Both the above-given values are used to calculate the actual Sensex value which is stated as follows:

Value of Sensex = (Total Free Float Market Capitalization / Base market capitalization) * Base period idea value

Here the base period for Sensex calculation is considered to be of the year 1978-79 and the base value of the index is 100.

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