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How the Sensex is calculated

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How the Sensex is calculated

We all hear in the news about Sensex every day, whether it has moved upward or downward. But most people have no idea about the Sensex. Sensex is one of the most prominent market indices in India. It is a short form of the Sensitive Index. It is a basket of 30 constituent stocks representing different sectors and are chosen based on various parameters, in which market capitalization is given significant importance. It is not only scientifically designed but also based upon the globally accepted construction and review methodology. Earlier the index was based upon the “Full Market Capitalization“ but now, it is calculated on Free market capitalization. It is the best methodology for index construction as all the world major index providers like MSCI, FTSE, S&P and Dow Jones use this free float methodology. Due to its wider acceptance, the Sensex is regarded as the heartbeat of the Indian stock market. India equity market has seen phenomenal growth in a decade. Right from the early nineties, the Sensex has witnessed various bull and bear markets, one can easily identify the booms and busts of Indian stock market through Sensex. The Sensex is calculated using the “Free Float Market Capitalization” methodology.  

Free Float Methodology refers to an index construction methodology that takes into consideration of the free float market capitalization of a company to index calculation and assigning weight to stocks in India. All the shares held by promoters, government and other locked-in shares are excluded in this calculation. Let us understand it through the Sensex calculation: 

Sensex Calculation:  

Let us consider two companies A & B constitute Sensex. 

Now, Free Float Market capitalization of A = 80,00,000 

Free Float Market capitalization of B= 1,000,0000 

Sensex Calculation Formula = (Sum of free float market capitalization/ Base Market Capitalization) * 100 

Base Market Capitalization is defined as the market cap of Sensex companies in the base year. For Sensex, the base year is 1978-79. 

Let us consider the base market capitalization is 25,00,000 

Hence the value = [ 80,00000+1,0000000] / 25,00000 = 720  

An investor should always take note that, the base market cap keeps changing. One also considers, the special cases like bonus issues or change of companies in the index.  

Here is the list of BSE 30 top companies:  

Asian Paints Ltd, Axis Bank Ltd, Bajaj Auto Ltd, Bajaj Finance Ltd, Bharti Airtel Ltd, Coal India Ltd, HCL Technologies Ltd, HDFC Bank Ltd, Hero MotoCorp Ltd, Hindustan Unilever Ltd, Housing Development Finance Corporation Ltd, ICICI Bank Ltd, IndusInd Bank Ltd, Infosys Ltd, ITC Ltd, Kotak Mahindra Bank Ltd, Larsen & Toubro Ltd, Mahindra and Mahindra Ltd, Maruti Suzuki India Ltd, NTPC Ltd, Oil & Natural Gas Corporation Ltd, Power Grid Corporation of India Ltd, Reliance Industries Ltd, State Bank of India Ltd, Sun Pharmaceutical Industries Ltd, Tata Consultancy Services Ltd, Tata Motors Ltd, Tata Steel Ltd, Vedanta Ltd, Yes Bank Ltd. 

The Sensex provides a gauge to check the performance of the industry leaders. It indicates the overall performance of the market, whether it is in bull run or bear market.  It’s also gets affected by various political and international news. Before investing one should always track the previous performance of the market.  

 

 

*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.

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