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Sensex Calculation Methodology

Sensex is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period.

The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization. The base period of sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. 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 scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex on a continuous basis.

Sensex-Scrip Selection Criteria

The general guidelines for selection of constituents in Sensex are as follows:

1. Listed History
2. Trading Frequency
3. Final Rank
4. Market Capitalization Weightage
5. Industry/Sector Representation
6. Track Record

Understanding Free-float Methodology

Concept (Source: BSE)

Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market.

It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market.Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology.

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* Contributed by: -
Prof. M. Guruprasad is Senior Faculty for Economics, Finance and Research, with AICAR Business School Raigad / Mumbai. He has more than 15 years of experience in research and educating / training management students. He was research scholar with the University of Mumbai. Worked as Executive in the Marketing research industry. Also Conducted Workshops and Training programmes. He has published articles in various industry magazines, newspapers and has initiated many discussions on academics.