Stock Market

9.What is Sensex?

I'm taking example from India again.
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.

The method adopted for calculating Sensex

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 point ?

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. 

Calculation of the 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.