How Is Sensex Calculated?


It is said that if you are looking for high returns from your investments, then you should consider the stock market. But investing in the stock market comes with some risks- between 2008 and 2011 the Sensex fluctuated between 7700 points to 21,200 points! So, it is advisable to have a complete understanding of the stock market before making an investment.

Keeping this in mind, let’s build our knowledge from the very basic- by understanding what Sensex is and how its value is calculated.

The Birth of Sensex

Sensex (Sensitive Index) is the index of the Bombay Stock Exchange (BSE).

Bombay Stock Exchange, which was started in 1875, did not have a scale to measure the ups and downs in the stock market. It was only on 1st Jan 1986 that BSE came out with a stock index-the Sensex- that subsequently became the barometer of the Indian stock market.

NSE is another popular stock exchange in India, and its index is called Nifty.

Sensex consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. As the oldest index in the country, it provides the time series data over a fairly long period of time and judicially captures the booms and busts of the Indian stock market.

How Is Sensex Calculated?

The Sensex was initially calculated based on the “Full Market Capitalization” methodology but was shifted to the “Free-float methodology” with effect from September 1, 2003.

As per the Free-float Market Capitalization methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology.

Free-float market capitalization is defined as that proportion of total shares issued by the company that is readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. So, simply put, Free-float market capitalization is the proportion of total shares available for trading to the general public.

Suppose a company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called ‘free-floating’ shares. If the price of each share is Rs. 120/-, then the ‘total’ market capitalization of the company is Rs 120,000 (1,000 x 120), but its free-float market capitalization is Rs 96,000 (800 x 120).

The calculation of Sensex involves the following steps broadly:

  1. Calculate the market capitalization of each of the 30 companies in the index by multiplying their stock price by the number of shares issued by that company.

  2. Multiply the market capitalization by the free-float factor to determine the free-float market capitalization.

    Free-float factor of a company is a multiple with which the total market capitalization of that company is adjusted to arrive at its Free-float market capitalization. It is determined by BSE based on the information submitted by the companies. The value of Free-float factor lies between 0.05 and 1.00. A Free-float factor of say 0.55 means that only 55% of the market capitalization of the company will be considered for index calculation.

  3. Divide the free-float market capitalization of the Index constituents by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions.

The base period of Sensex is 1978-79 and the base value is 100 index points.

An Example:

Suppose the Index consists of only 2 stocks: Stock X and Stock Y. Then, the table below shows the SENSEX calculation:

Understanding the result:

Step 1 and Step 2 are self-explanatory. Let’s understand the Step 3.

The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that if at that time the market capitalization of the stocks that comprised the index was 60,000, then the index-value at that time would be 100. So, using simple unitary method, we can find the corresponding present value of the SENSEX.

The factor 100/60000 is called the index divisor.

What are the 30-benchmark stocks?

The 30-benchmark stocks are given below, along with their Free-float factor:

Note that this list keeps on changing from time to time, based on the various guidelines that BSE follows for the selection of benchmark stocks.

Do you invest in shares? How comfortable are you with the nitty-gritty of the stock market? Share your thoughts with us through your comment.

If you found this article useful, don’t forget to share it with your friends.

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19 Responses to “How Is Sensex Calculated?”

  1. Arjun Singh
    November 7, 2011 at 1:42 pm #

    it was really useful for a person like me.. who was actively trying to invest in stock market.. :)

    it would have been even better if u would have mentioned about online watchdogs of stock markets like.. google finance, rediffmoney etc.. :)

    • Anshul
      November 7, 2011 at 3:26 pm #

      Hi Arjun,
      That would have been too much of information for one article. Rest assured, I’ll cover these topics in the subsequent articles :-)

  2. Ashok
    November 8, 2011 at 8:40 am #

    Hey Anshul, Its Really good. Go ahead with further details of the same.

    • Anshul
      November 8, 2011 at 10:55 pm #

      Thanks Ashok. I’ll be posting second part very soon. Hope you are already subscribed, so that you don’t miss it :)

  3. Girish S
    November 8, 2011 at 9:50 pm #

    The approach and the simple language used to explain is what makes your articles a one stop destination to understand things very clearly.
    Thanks.

  4. Girish S
    November 8, 2011 at 9:53 pm #

    And hey Anshu,l information given in small packets help us remember them for a longer period. Dont add too much information in one article. You are doing the right thing by keeping them short and simple.

    • Anshul
      November 8, 2011 at 10:54 pm #

      Thanks for the feedback Girish, I’ll keep this in mind :)

  5. vikranth
    November 15, 2011 at 12:42 pm #

    great article anshul…..
    What is a TRP and how it is calculated?
    can u research on dis topic …….

    • Anshul
      November 15, 2011 at 10:19 pm #

      Thanks Vikranth.. I’ll definitely do a research on this topic and post an article on it soon.

  6. Amit bassi
    January 29, 2012 at 1:18 pm #

    how to now the no of shares issued by company for free float

  7. Chintak
    April 25, 2012 at 6:15 pm #

    Oh my god.. Its dummies guide. I am new to all these share market stuff but i understood everything. great stuff anshul.

  8. bhawansingh
    July 15, 2012 at 7:42 pm #

    hai, sir i want to inveist some money ,pls guide me in witch market i will inveist. thankingyou

  9. sachin
    July 20, 2012 at 12:21 am #

    what is the current(may be fixed) base market capitalization value is being used for calculating sensex? and how this figure was calculated in first place? was it actual figure as on 1978-79? what if some of sensex 30 companies were not in existence that time?

  10. sathyavelu
    August 9, 2012 at 2:31 pm #

    Excellent is the only word I have for all the articles i have read. please tell me about NSE and how all the calculation happens.
    Plz give me the link if you have already published the article.

  11. Kalpesh
    August 22, 2012 at 3:45 pm #

    Hey Anshul, it was good stuff, but i would request if u can throw some light on following things
    1) ” how the contribution of each shares in Sensex 30 is decided ?”
    2) In the above Ex. u have assumed the Fig 60,000, but for our Sensex what is the value considered for calculation?

    Regards,

    Kalpesh

  12. Vasant Kerkar
    September 16, 2012 at 3:56 pm #

    Hi Anshul thanks for sharing your knowledge its really appriciated. it was good information with simple words … but I have one question.

    Like kalpesh asked you ..

    In the above Ex. u have assumed the Fig 60,000, but for our Sensex what is the value considered for calculation?

    Please respond whenever you get time.

  13. George
    February 16, 2013 at 11:21 am #

    Why is it that some funds such as ULIPS,PMS and some equity fund values drop even when the NIFTY or SENSEX increases its values.What is the yardstick to bear in mind to make decisions on switches and redemptions while handling various investment forms

  14. raman
    February 18, 2013 at 9:37 pm #

    good

  15. vijay
    July 17, 2013 at 2:50 pm #

    Dear Anshul
    its Awesome
    really the information provided by you is helpful
    keep on going
    i admire your effort taken for this website creation

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