What is Sensex? How is it calculated? (#Complete Guide)

What is Sensex? How is it calculated? (#Complete Guide)

One day, I thought to check my broker’s knowledge about the stock market.

So I called them and asked him “Sir, what is the Sensex”? And “how is it calculated”?

I thought he knew the answer. But I shocked to hear his answer.

The answer was : “I’m sorry, I don’t know much about it,”

same as my broker, most investors do not know about the Sensex

But here, In this all-new guide you’ll learn all about:

  • What is Sensex?
  • How it is calculated? (Step-by-Step)
  • Index Performance since 1979

In detail

So are you ready?

Let us start our first topic.


What is Sensex? (#Brief Introduction)

Here is the brief introduction about Sensex 30.

  • Sensex stands for Sensitive Index.
  • It is the benchmark index of the Bombay stock exchange(BSE).
  • it is the oldest index in the country.
  • Sensex is a basket of 30 stocks representing a sample of large, liquid and representative companies. In addition to that, All stocks are fundamentally sound and also from different industries.
  • These 30 companies are known as Bluechip companies.
  • The base year of Index is 1978-79 and the base value is 100.
  • The Index was initially calculated based on the “Full Market Capitalization” methodology but was shifted to the “Free-float methodology” with effect from September 1, 2003.
  • The “Free-float Market Capitalization” methodology of index construction is regarded as an industry best practice globally.
  • Due to is wide acceptance amongst the investors; It is regarded to be the pulse of the Indian stock market.

What does the Sensex price show?

Whenever you watch any trading channel, you see that the price of Sensex is changing.

“What does this price show”?

  • The Sensex is the main index of the stock market. so its price reflects the general movement of all stocks present on the BSE. In other words, reflects the market mood

Simply put,

  • When the Sensex rises, most stocks rise on the BSE that day.
  • When the Sensex down, most stocks fall on the BSE that day.

Here is an example:

sensex price on 290april 2020
no of companies up and down on the sensex
  • Sensex up 605 points(First figure).
  • 1391 out of 2549, stocks up on that particular day(second figure).

The Sensex value also reflects the economic condition of our country.

There is a very strong relationship between our economy and the stock market.

But How?

  • When the economy booms, more demand for product arises.
  • More demand is converted into more profit of the company.
  • More profits attract more investors to participate in the stock market.
  • This will take the stock market to new heights.

So when the Sensex makes new highs day by day, it indicates that the economy is booming,

and when the Sensex comes down or crashes it shows that the economy is in bad shape or it will be in bad shape in the future.


How is the Sensex calculated? (step-by-step)

The Sensex price is updated every 7 seconds. BSE has developed software through which it calculates price changes.

But how can we calculate the Sensex price ourselves?

Here is the process.

Initially, the Sensex was calculated by the total market capitalization method.

Since 2003, the Sensex has been calculated using the “free-float market capitalization” method.

Before we move on, we will first learn about it

  • Total Market Capitalization
  • Free Float Market Capitalization

Total Market Capitalization

Total market capitalization refers to the total market value of a company in the open market.

  • It is determined by multiplying the number of shares issued by the company and the share price.
total market cap of company

Let us calculate the total market cap of Asian Paints Ltd.:

Share price:

asian paints market price

Total Number of share issued by the company:

Total Number of share issued by the company:

Toatl Market Capitalization :

=95,91,97,790 x 1852.30

=1,77,672.21 Cr


Free Float Market capitalization

The only difference between total and free-float market cap is the number of shares calculated for that.

  • In total market cap, the total number of shares is taken into account.
  • In a free-float market cap, only shares that are free, in other words shares that are not in the lock-in period, are taken into account.

The free-float market cap of a company is determined solely by multiplying the total number of shares available for public trading and the share price.

Free Float Market Capitalization

OR

Free Float Market Capitalization

Also Read :What is Free-Float Factor?-(#Complete Guide)

You can calculate free float market cap from any formula.

First, calculate the free float factor

Shareholding pattern of asian paints

Free float factor is how many shares are available in public trade.

Here Public holding is 47.21%.

So Free Float Factor=0.47

And the total market cap of Asian Paints=1,77,672.21 Cr

So,

The Free Float Market Cap :

=0.47 x 1,77,672.21 Cr

=83,505.94 Cr

You can also directly get the data from www.bseindia.com site.

Total Market cap and Free Float Market Cap

Now, let’s learn about our main topic

Sensex Calculation(Step-By-Step)

To calculate the Sensex, the free-float market capitalization of all 30 companies in the index is divided by a number called the index divider.

sensex formula

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, replacement of Securities, etc.

Index Factor= 100/Market Cap Value in 1978-1979.

The index factor at present is 105.17

The Sensex is at 32,720.16 on April 29,
But how does it come about?

For that, you have to follow 4 simple steps and you will get the value of the index

Here are 4 simple steps:

Step-1 : Open site www.bseindia.com

Step-2 : Click Here

sensex calculation

Step-3 : Take the free float market cap for more calculations.

full and free float market cap

Step-4 : Divide the float market cap by the index factor

  • Sensex value (29 Apr 2020)= 3,441,489/Index Factor
  • Sensex =3,441,489/105.17
  • 32720.16

How do Sensex prices change?

For our simplicity, suppose there are only two stocks in the Sensex. Stock A and Stock B.

And Index Factor is 10

Company
A
Company
B
Share Price100150
Total Equity Share1000800
Promotor and Promotor Group600600
Public Holding400200

As we discussed above,

For company A :

Free float market cap= (Total Number Of Share available for public trading only) x (share price)
=400×100
=40,000

For company B :

Free float market cap= (Total Number Of Share available for public trading only) x (share price)
=200×150
=30,000

Sensex = Total Free Float Market Cap of 30 companies/Index Divisor
= (40,000+30,000)/10
=7,000


Now suppose the next day Company A shares rise by 10 points and Company B shares fall by 50 points.

then

For company A :

Free float market cap= (Total Number Of Share available for public trading only) x (share price)
=400×110
=44,000

For company B :

Free float market cap= (Total Number Of Share available for public trading only) x (share price)
=200×100
=20,000

So the next day

Sensex = Total Free Float Market Cap of 30 companies/Index Divisor
= (44,000+20,000)/10
=6400


Index Performance

Sensex Performance Over the year

This is a chart of Sensex value since 1979.

The index started its journey with 100 points in 1979 and today it is 33,000. But the journey was not in a straight line.

See the graph, you can see that in some years it goes up and in some years it goes down. But in the long run the index goes up.

Now calculate the index return in the CAGR term. It returns more than 15% without dividends. And with dividends (about 1.5%) it returns 16.5% in 41 years.

If a person was smart enough at that time and only followed index stocks, he would have got a return of more than 15% in the long run.

Here is the value of 10,000 at the end of 41 years if he gets 15% (CAGR) return.

Your small amount of Rs 10,000 would have gone up to Rs 30,80,000 (Rs 30.8 lakh) in 41 years and with that amount, you can easily live the next life very well.

In addition, you would have received this return without your hard work.


How did the value of the index reach 33,000?

You all know that the Sensex is a free-float market cap of all 30 stocks multiplied by its share price.

A company’s free float stays the same throughout the year. but share prices fluctuate.

Whenever a company’s share price rises, it also raises the price of the index.

Shares of many companies in the index have risen manifold over the past few years.

This is the price chart of HDFC Bank, the best bank in India. Here you can see that the share price of hdfc bank has been rising steadily for the last few years.

hdfc bank share price

In this way, as the share price rises, so does the value of the index. And because of that, the value of the index has started from 100 and reached 33,000 today.


Also Read : Sensex’s roller-coaster journey: From 100 to 39,000

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