1) Sensex is the common name for the Bombay Stock Exchange

Sensitive Index. It consists of the 30 largest and most

actively traded stocks, representative of various sectors, on
the Bombay Stock Exchange.

2)What are the Sensex & the Nifty?

Ans The Sensex is an "index". What is an index? An index is basically an

indicator. It gives you a general idea about whether most of the stocks have
gone up or most of the stocks have gone down.

The Sensex is an indicator of all the major companies of the BSE.

The Nifty is an indicator of all the major companies of the NSE.

If the Sensex goes up, it means that the prices of the stocks of most of the
major companies on the BSE have gone up. If the Sensex goes down, this
tells you that the stock price of most of the major stocks on the BSE have
gone down.

Just like the Sensex represents the top stocks of the BSE, the Nifty
represents the top stocks of the NSE.

Just in case you are confused, the BSE, is the Bombay Stock Exchange and
the NSE is the National Stock Exchange. The BSE is situated at Bombay and
the NSE is situated at Delhi. These are the major stock exchanges in the
country. There are other stock exchanges like the Calcutta Stock Exchange
etc. but they are not as popular as the BSE and the NSE.Most of the stock
trading in the country is done though the BSE & the NSE.

Besides Sensex and the Nifty there are many other indexes. There is an index
that gives you an idea about whether the mid-cap stocks go up and down.
This is called the “BSE Mid-cap Index”. There are many other types of
indexes.

There is an index for the metal stocks. There is an index for the FMCG stocks.
There is an index for the automobile stocks etc.

3)How to calculate BSE SENSEX?

Ans This article explains how the value of the “BSE Sensex” or
“sensitive index” is calculated. If you are not sure what we mean by
the Sensex or what the Sensex is all about, you can find this out by

reading our “How to make money in the stock market?” article.

The Sensex has a very important function. The Sensex is supposed to

be an indicator of the stocks in the BSE. It is supposed to show whether

the stocks are generally going up, or generally going down.

To show this accurately, the Sensex is calculated taking into

consideration stock prices of 30 different BSE listed companies. It is

calculated using the “free-float market capitalization” method. This is a

world wide accepted method as one of the best methods for calculating

a stock market index.

Please note: The method used for calculating the Sensex and the 30

companies that are taken into consideration are changed from time to

time. This is done to make the Sensex an accurate index and so that it

represents the BSE stocks properly.

To really understand how the Sensex is calculated, you simply need to

understand what the term “free-float market capitalization” means. (As

we said earlier, the Sensex is calculated on basis of the “free-float

market capitalization” method) But, before we understand what “free-

float market capitalization” means, you first need to understand what

“market capitalization” means.

4) What is "market capitalization"?

Ans You probably think that you have never heard of the term

“market capitalization” before. You have! When you are talking about

“mid-cap”, “small-cap” and “large-cap” stocks, you are talking about

market capitalization!

Market cap or market capitalization is simply the worth of a company in

terms of it’s shares! To put it in a simple way, if you were to buy all the

shares of a particular company, what is the amount you would have to

pay? That amount is called the “market capitalization”!

To calculate the market cap of a particular company, simply multiply

the “current share price” by the “number of shares issued by the

company”! Just to give you an idea, ONGC, has a market cap of

“Rs.170,705.21 Cr” (when this article was written)

Depending on the value of the market cap, the company will either be a

“mid-cap” or “large-cap” or “small-cap” company! Now the question is,

how do YOU calculate the market cap of a particular company? You

don’t! Just go to a website like MoneyControl.com and look up the

company whose market cap you are interested in finding out! The

figure in front of “Mkt. Cap” will be the market cap value.

Having seen what market cap is and how to find out the market cap of

a particular company, let us try to understand the concept of “free-float

market
5) What is "free-float market capitalization"?

Many different types of investors hold the shares of a company! The

Govt. may hold some of the shares. Some of the shares may be held

by the “founders” or “directors” of the company. Some of the shares

may be held by the FDI’s etc. etc!

Now, only the “open market” shares that are free for trading by

anyone, are called the “free-float” shares. When we are calculating

the Sensex, we are interested in these “free-float” shares!

A particular company, may have certain shares in the open market

and certain shares that are not available for trading in the open

market.

According the BSE, any shares that DO NOT fall under the following

criteria, can be considered to be open market shares:

• Holdings by founders/directors/

acquirers which has control element

• Holdings by persons/ bodies with

"controlling interest"

• Government holding as

promoter/acquirer

• Holdings through the FDI Route

• Strategic stakes by private corporate

bodies/ individuals
• Equity held by associate/group

companies (cross-holdings)

• Equity held by employee welfare

trusts

• Locked-in shares and shares which

would not be sold in the open market

in normal course.

A company has to submit a complete report

about “who has how many of the company’s

shares” to the BSE. On the basis of this, the

BSE will decide the “free-float factor” of the

company. The “free-float factor” is a very

valuable number! If you multiply the "free-

float factor" with the “market cap” of that

company, you will get the “free-float market

cap” which is the value of the shares of the

company in the open market!

A simple way to understand the “free-float

market cap” would be, the total cost of

buying all the shares in the open market!

So, having understood what the “free float

market cap” is, now what? How do you find

out the value of the Sensex at a particular

point? Well, it’s pretty simple….

First: Find out the “free-float market cap” of

all the 30 companies that make up the

Sensex!

Second: Add all the “free-float market

cap’s” of all the 30 companies!

Third: Make all this relative to the Sensex

base. The value you get is the Sensex value!

The “third” step probably confused you. To

understand it, you will need to understand

“ratios and proportions” from 5th standard

mathematics. Think of it this way:

Suppose, for a “free-float market cap” of

Rs.100,000 Cr... the Sensex value is 4000…

Then, for a “free-float market cap” of

Rs.150,000 Cr... the Sensex value will be..

100,000/4000=150,000

?150,000/100,000*4000

So, the Sensex value will be 6000 if the

“free-float market cap” comes to

Rs.150,000 Cr!
Please Note: Every time one of the 30

companies has a “stock split” or a "bonus"

etc. appropriate changes are made in the

“market cap” calculations.

Now, there is only one question left to be

answered, which 30 companies, why those

30 companies, why no other companies?

The 30 companies that make up the Sensex

are selected and reviewed from time to time

by an “index committee”. This “index

committee” is made up of academicians,

mutual fund managers, finance journalists,

independent governing board members and

other participants in the financial markets.

The main criteria for selecting

the 30 stocks is as follows:

Market capitalization: The company should

have a market capitalization in the Top 100

market capitalization’s of the BSE. Also the

market capitalization of each company

should be more than 0.5% of the total

market capitalization of the Index.

Trading frequency: The company to be

included should have been traded on each

and every trading day for the last one year.

Exceptions can be made for extreme

reasons like share suspension etc.

Number of trades: The scrip should be

among the top 150 companies listed by

average number of trades per day for the

last one year.

Industry representation: The companies

should be leaders in their industry group.

Listed history: The companies should have a

listing history of at least one year on BSE.

Track record: In the opinion of the index

committee, the company should have an

acceptable track record.

Having understood all this, you now

know how the Sensex is calculated.