What are the Sensex & the Nifty?

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

theNSE.

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. If you are interested in

knowing how the SENSEX is actually calculated...you

must check-out our "How to calculate BSE SENSEX?"

article!
How to calculate BSE SENSEX?

Requested by: Lt Col Ashis Kumar Mishra

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.

Next - What is "market capitalization"? >>

What is "market capitalization"?

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 cap”

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..

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 are 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.

Jai Hind.