Sensex Prof. C.K.Sreedharan Unit No: 9A

The Sensex is an "index". An index is basically an indicator. It gives 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 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.

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 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.

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.

Sensex consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange.

The SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a sample of large, well-established and financially sound companies. The index is widely used to measure the performance of the Indian stock markets.

The NSE S&P CNX Nifty 50 index is a well diversified 50 stock index accounting for 24 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.

Sensex is calculated using the “Free-float Market Capitalization” methodology. Instead of using a company’s outstanding shares it uses its float, or shares that are readily available for trading. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

It is calculated taking into consideration prices of 30 largest and most actively traded stocks of the BSE listed companies. These shares make more than 50% of the total market capitalization in the BSE market.

The formula for calculating the SENSEX = (Sum of free flow market cap of 30 biggest stocks of BSE)*Index Value in /Market Cap Value in Note: The base value (index value) of the Sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is

Example: Suppose the Index consists of only 2 stocks: Stock A and Stock B. Stock A has 1000 shares out of which 200 are held by the promoters and only 800 shares are available for trading to the general public. These 800 shares are the so-called ‘free-floating’ shares. Similarly, Stock B has 2,000 shares out of which 1000 are held by promoters and 1000 are available for trading (free-floating).

Assume price of Stock A is Rs.100. The total market capitalisation of Stock A is Rs 1,00,000 (1,000 x 100) and its free-float market capitalisation is Rs 80,000 (800 x 100). Assume price of Stock B is Rs.200. The total market capitalisation of Stock B is Rs 4,00,000 (2,000 x 200) and its free-float market capitalisation is Rs 2,00,000 (1000 x 200).

Then sum of free float market cap of these 2 companies (A & B) = (800* *200) = = Rs Assume Market Cap during the year was Rs.50,000 Apply formula Then SENSEX = *100/50,000 = 560.

Use same method for calculating NSE Nifty Base year is 1995 and base value (index value) is NIFTY is calculated based on 50 stocks. The formula for calculating the Nifty = (Sum of free flow market cap of 50 biggest stocks of NSE)*Index Value in 1995/Market Cap Value in 1995.