What is Sensex? How is it calculated?


SENSEX

The SENSEX-(or SENSitve indEX) was introduced by the Bombay stock exchange on January 1 1986. It is one of the prominent stock market indexes in India. The Sensex is designed to reflect the overall market sentiments. It comprises of 30 stocks. These are large, well-established and financially sound companies from main sectors.

METHOD ADOPTED FOR SENSEX CACULATION

The method adopted for calculating Sensex is the market capitalisation weighted method in which weights are assigned according to the size of the company. Larger the size, higher the weightage.

The base year of Sensex is 1978-79 and the base index value is set to 100 for that period.

WHY IS THE BASE VALUE SET TO 100 POINTS?

The total value of shares in the market at the time of index construction is assumed to be ’100′ in terms of ‘points’. This is for the purpose of ease of calculation and to logically represent the change in terms of percentage. So, next  day, if the market capitalization moves up 10%, the index also moves 10% to 110.

HOW ARE THE STOCKS SELECTED?

The stocks are selected based on a lot of qualitative and quantitative criterias. You can view the listing criteria here.

HOW IS THE INDEX CONSTRUCTED?

The construction technique of index is quite easy to understand if we assume that there is only one stock in the market. In that case, the base value is set to 100 and let’s assume that the stock is currently trading at 200. Tomorrow the price hits 260 (30% increase in price) so, the index will move from 100 to 130 to indicate that 30% growth. Now let’s assume that on day 3, the stock finishes at 208. That’s a 20% fall from 260. So, to indicate that fall, the Sensex will be corrected from 130 to 104(20%fall).

As our second step to understand the index calculation, let us try to extend the same logic to two stocks – A and B. A is trading at 200 and let’s assume that the second stock ‘B’ is trading at 150. Since the Sensex follows the market capitalization weighted method, we have to find the market capitalization (or size of the company- in terms of price) of the two companies and proportionate weightage will have to be given in the calculation.

How do we compute size of the company- in terms of price?

  • That’s simple. Just multiply the total number of shares of the company by the market price. This figure is technically called ‘market capitalization’.

Back to our example-

We assume that company A has 100,000 shares outstanding and B has 200,000 shares outstanding. Hence, the total market capitalization is (200 x 100000 + 150 x 200000) Rs 500 lakhs. This will be equivalent to 100 points.

Lets assume that tomorrow, the price of A hits 260 (30% increase in price) and the price of B hits 135. (10% drop in price).  The market capitalization will have to be reworked. It would be – 260 x 100,000 + 135 x 200,000 = 530 lakhs. That means, due to the changes in price, the market capitalization has moved from 500 lakhs to 530 indicating a 6% increase. Hence, the index would move from 100 to 106 to indicate the net effect.

This logic is extended to many selected stocks and this calculation process is done every minute and that’s how the index moves!

CALCULATION OF SENSEX.

What we said was the general method to construct indices. Since, the Sensex consists of 30 large companies and since it’s shares may be held by the government or promoters etc, for the purpose of calculating market capitalization only the free float market value is considered, instead of the total number of shares.

What is free float?

  • That’s the total number of shares available for the public to trade in the market. It excludes shares held by promoters, governments or trusts, FDIs etc..
  • To find the free float market value, the total value of the company (total shares x market price) is further multiplied by a free float market value factor, which is nothing but the percentage of free float shares of a particular company.
  • So logically, the company which has more public holding will have the highest free float factor in the Sensex. This equalizes everything.
  • Example- let’s assume that the market value of a company is Rs 100,000 Crore and  it has 100 Crore shares having a value of Rs 1,000 each but only 20% of it are available to the public for trade. The free float factor would be 20/100 or 0.20 and the free float market value would be .20 x 100,000 = 20,000 Crores.
  • You need not calculate the free float market capitalization since its available straight on the BSE website – Click this link to get it.

NOW, LET’S SE HOW THE SENSEX MOVES.

  • Sensex value = Current free-float market value of constituents stocks/Index Divisor

So, the numerator is available straight from the BSE site. It’s the total of free float factors of 30 stocks x market capitalization.

NOW, THE DENOMINATOR.

The index divisor nothing but the present level of index.

So, now, we have all the figures.

Lets assume that the  free-float market capitalisation is Rs 10,00,000 Crore. At that point, the Sensex is at 12500. What would be the value of Sensex if the free-float market capitalization is Rs 11,50,000 Crore?


(Those who can’t find the answer may go back to the ratios and proportions chapter elsewhere in school text book)

……..The answer is 14,375.

You may like these posts:

  1. What is a stock index?
  2. Stock markets in india
  3. BSE stock classifications

98 Responses to “What is Sensex? How is it calculated?”

Pushpendra tiwari

June 21, 2011 at 1:00 am

How to buy a share, and what’s the idial investment for frist time.

Kassi

September 21, 2011 at 3:10 am

Keep on writing

Elida

September 21, 2011 at 8:01 pm

Big help, big help.

TANMOY

March 16, 2012 at 12:14 pm

great work Jins. no doubt if basics are strong, we can sail a long way.

priya

June 27, 2012 at 4:42 pm

good

J Victor

June 28, 2012 at 6:00 pm

thanx

Prateesh

August 20, 2012 at 3:30 pm

Hello.. I had a question If I say that there is an “UNEVEN FLUCTUATION IN INDIAN STOCK MARKET”.. Am I saying it right by saying UNEVEN? How would you react to such a statement?

J Victor

August 20, 2012 at 6:03 pm

The language is confusing. It could mean that the market is volatile. The word ‘uneven’ may mean that there is lack of direction or biasedness.

mANAN

September 19, 2012 at 7:57 pm

thanxxx nice 2 understand

Ankyt

December 4, 2012 at 12:52 am

thanx bhaiya..

Bharath

March 4, 2013 at 10:57 pm

Its really easy to understand….

pallavi

March 6, 2013 at 9:20 pm

thank you sir , its really useful,and i like the way you explained

yogesha

March 26, 2013 at 12:13 pm

thank u bhaiya

mintu

June 4, 2013 at 11:41 pm

great…now its very easy 2 understand….:D

sudhindra

July 1, 2013 at 11:01 am

Great work mr victor. All the very best to your future endeavours.

J Victor

July 1, 2013 at 11:05 am

thankyou :)

Ravi

July 1, 2013 at 1:21 pm

its good and help to know about sensex keep it up….

Pari

July 12, 2013 at 12:40 pm

Thanks a lot:-))

Tushar

July 23, 2013 at 11:19 pm

very informative and crisp writing. going to recommend to my whole class tomorrow.

Sai Sudheesh

July 30, 2013 at 11:01 am

short and sweet capsule of information …good job !! thanks !!

Tanveer

August 29, 2013 at 2:43 pm

The concerned concept is written in very simple tone so that an ordinary individual can also comprehend it with out much hindrance.

Robin

September 19, 2013 at 5:51 pm

Jins , you are Good , May GOD give you the skills to explain the basics in such an easy way as you do. Good Work.

trilok

September 29, 2013 at 6:51 pm

am thankful to this blog for giving a valuable information

kashyap

October 21, 2013 at 7:44 am

Thank you! Explained clearly!

ravi

December 24, 2013 at 5:18 pm

very useful

v.ashok

January 3, 2014 at 2:15 pm

Tanks for your valuable advice

v.ashok

January 3, 2014 at 2:20 pm

Tanks a lot

Roshni

January 7, 2014 at 8:53 am

Nicely explained.

Thanks very much.

Franklin

January 10, 2014 at 1:53 pm

very nice hatt’s off :-) :)

Akmal Ansari

January 17, 2014 at 2:58 pm

It very nice to understand the concept of index, Thanks a lot

veerangna

January 18, 2014 at 5:52 pm

thanks for such a helping information………this is really good

Hitesh

April 3, 2014 at 7:53 pm

It was really helpful. Please give details about Put & Call used in stock market.

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May 4, 2014 at 12:51 pm

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May 4, 2014 at 12:54 pm

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seeta

May 31, 2014 at 2:26 am

Very well explained. Each chapter is so neat;y choreographed and interesting.

anurag

June 15, 2014 at 11:49 am

very well explained sir…….. thank you

supriya

July 5, 2014 at 10:47 pm

It’s really informative

sourav Majhi

July 19, 2014 at 10:58 am

thank you

mayur

July 19, 2014 at 9:22 pm

Its awesome informtion…thanx alot…

anusha

July 23, 2014 at 9:40 am

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supreeth

July 26, 2014 at 2:37 pm

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deepak

July 26, 2014 at 9:32 pm

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ganga

August 25, 2014 at 12:07 pm

Very nice.

manjunath kittur

August 29, 2014 at 5:23 pm

Thanks it is easy to understand

deepak

September 15, 2014 at 12:31 am

Thank you

Rojith

October 11, 2014 at 9:51 am

Partially understood

Manu

October 11, 2014 at 1:09 pm

Thank You For that

bhupat

December 1, 2014 at 8:14 am

thank sir

gurram prasad

December 1, 2014 at 1:33 pm

very nice about explanation

Neha Mittal

December 6, 2014 at 4:26 pm

Really informative thnxx…:)

nimish

December 9, 2014 at 4:57 pm

Thanks it is easy to understand

Kurian Vaidian

December 12, 2014 at 6:01 pm

It is very useful for investors to understand the basic things about stock market.

Mallikarjun

December 13, 2014 at 1:30 pm

really helpful!
thanks

Jose

December 16, 2014 at 10:46 am

thanx….

uday

December 17, 2014 at 10:39 am

thank u very much for the website

shahid

January 2, 2015 at 11:42 am

thank u sir for the explanation u offered is very easy to understand even for the ordinary individual about the core point to make investment in stock exchange

nazneen

January 3, 2015 at 5:33 pm

Thank u sir it has helped me to gain knowledge and even to do my project on sensex….:-)

rohit

January 27, 2015 at 7:57 am

thank u sir….

neelam

February 14, 2015 at 11:13 pm

Thanks Victor

Ravi Dhingani

May 3, 2015 at 12:36 pm

it is really very easy to understand, as of now i have rade so many articles for sensex calculation but not got satisfied answers, but after reading this info i totally come to know how to calculate sensex and all.

Thanks,

sri

June 7, 2015 at 6:31 pm

thank u very much

sourav

June 20, 2015 at 7:52 pm

Amazingly done

sunil chauhan

June 27, 2015 at 10:58 am

it really great

Abhijit Ray

June 27, 2015 at 11:13 pm

Thanks for good explanations and keep on writing.

Lavanya Bhardwaj

July 12, 2015 at 3:31 pm

Thank you so much for the help

karthikeyan

July 18, 2015 at 1:23 am

Pinpoint explanations, very well explained for the beginners, Thank you for sharing.
Please keep on writing.

ABHIJIT PAL

July 26, 2015 at 6:27 pm

THANKS FOR EXPLAINING THE MOST COMPLICATED CALCULATIONS OF SENSEX IN A SIMPLE WAY WHICH HELPS ME A LOT TO UNDERSTNAD THE CLACULATIONS

Pradeep

July 27, 2015 at 12:01 am

Its well explained step by step with ease examples …easy to digest and understand…
Well said and best of luck for future….

Nilesh

September 7, 2015 at 7:53 pm

Thanks a lot !!
Nice explanation…

Dibyendu Pal

September 8, 2015 at 12:58 pm

Thanks a lot for giving knoledge about sensex

Badgujar

October 1, 2015 at 10:54 pm

now i understood the sensex properly

vinod

October 3, 2015 at 8:16 am

thank you very much it is easy to understand

mahendra

January 17, 2016 at 9:44 am

Its too good information

sanjeebosh

January 17, 2016 at 8:55 pm

Thanks a lot .very well exaplained

Amitabh singh

January 24, 2016 at 8:13 pm

very good explained.

Sagar rathod

February 5, 2016 at 1:46 pm

Thanks sir,very useful for business knowledge

Vignesh

February 25, 2016 at 2:58 pm

Awesome… I’m struggling from several months to clearly understand the Index and Sensex. Finally I got it here with excellent explanations with perfect examples….
Thanks a lot..

aarati

February 26, 2016 at 12:16 pm

Nice to easy understanding

B.N.Panda

March 25, 2016 at 9:49 am

Thank you sir I have c learly understood the index construction

Sasidhar

March 26, 2016 at 9:12 am

It is Easy to learn

tripura

March 27, 2016 at 9:36 pm

thank u

Kirti

April 17, 2016 at 1:11 pm

Well explained…easy to understand the concept of sensex nd how it would be calculated.

s k de

April 21, 2016 at 1:03 pm

I’ve been struggling to understand these things for long time. I questioned many managemet students. They unnecessarily confuse. Here is an explanation that clears every doubt. The example has made it amply clear. I’m grateful and thank you ver much.

J Victor

April 25, 2016 at 8:20 am

thankyou !!

s.vijaay

April 30, 2016 at 9:46 am

Gurubhyom Namaha

ShanPalaniRam

June 8, 2016 at 11:43 pm

Excellent walk through!! Thanks !!!

vijay

June 10, 2016 at 9:57 am

verry good understanding

Muhammed Fizel

June 15, 2016 at 7:29 am

Excellent walk through!!

Prasad Arak

June 24, 2016 at 5:54 pm

Nice way to explain. Short but exhaustive.

sandhya

June 26, 2016 at 11:21 am

thankyou so much sir… u explain better than my college proffessors.. it was very helpful. y dont u create an app so that it would be easy to access? because i love ur website.. thanku again

prakash

July 23, 2016 at 11:06 pm

good explanation,saticified.

Deepak

July 30, 2016 at 9:57 pm

Well Explained. Easy to Understand. Thanks

Ishan

August 6, 2016 at 5:42 pm

Can someone help me to find the answer of question that is on the last

Pavan rai

August 7, 2016 at 1:04 pm

thanks for gud explain…..

Prashant Singh

September 9, 2016 at 5:50 pm

Nice explanation JINS.

Nisar

October 1, 2016 at 5:17 pm

Thaanks. For a beginer to understand. Its very easily and nicely explained.

harihar

November 3, 2016 at 12:34 am

Very gud explaination

Aditya

November 11, 2016 at 12:38 pm

How sensex value is going to help anyone in trading of shares ?

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