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:
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..
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.
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.
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