# How to Calculate Index ( Sensex and Nifty)...!!!

Srikant , 09 July 2010

How to Calculate Index (Sensex & NIFTY)....!!!

Stock is the smallest unit of ownership of a company in other words stock is a share in the ownership of the company. Stock is also called as share and equity. If a person purchases stocks of a company it means that he is one of the owners of the company, and ownership increases as he goes on purchasing more amount of stocks. Technically speaking a shareholder of a company owns a small part of every assets of the company such as building, furniture, trademarks, etc. A share holder holds ownership in all tangible and intangible assets of the company.

Initially stocks were represented by share certificates which worked as the proof of ownership of the company but now it is dematerialized and every trading transaction happens through computer using DEMAT accounts. There are many stock exchanges in our country like BSE, NSE, Calcutta stock exchange, Bangalore Stock Exchange, etc. But NSE and BSE are major among them most of the stocks are traded in these two Exchanges.

SENSEX

Sensex stands for “sensitive index”, it represents BSE (Bombay Stock Exchange). Sensex indicates all major companies of BSE. Sensex is calculated using share prices of 30 major companies which are listed in BSE. If the Sensex goes up it means that share values of most of the major companies have gone up and vice versa.

NIFTY

Nifty indicates NSE; it is the leading index for large companies in the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy. NIFTY represents approximately 47% of the traded value of all stocks on the National Stock Exchange. It is calculated using base year 1995 and base index value 1000.

Criteria for selecting stocks to calculate Index

Below given are the criteria for selecting stocks to calculate Index

• Listing history: The Company should have listing history on BSE for at least one year
• Track record: company should have good track record.
• Market capitalization: Company should be one among 100 market capitalizations of BSE, and each company should have more than 0.5% of total market capitalization of BSE index.
• Frequency of trading: company stocks should be traded on each and every trading day for the last one year.
• Industrial representation: company should be a leader in the industry it represents.

Market Capitalisation

Market capitalization is the total worth of all outstanding (issued) shares of a company. It represents the total worth of a company.

Market capitalization=

No of shares outstanding x market price of share

Free Float Market Capitalization

Free float concept is an index construction methodology which makes use of free float shares in the market. Free float market capitalization is the total worth of all shares of a company which are available for trading in the open market. These shares are called free float shares and are available for trading by anyone.

Example:

Company ‘XYZ Ltd’ issues 10000 shares, out of which 2000 shares held by government, 5000 shares by directors of the company and remaining 3000 shares are available in the open market for trading. Market price of share is 100 Rs.

Here;

Total Shares =                                      10000

Shares Held by Government =                  2000

Shares Held by Directors =                       5000

Shares available in the Open Market =        3000

Market price of share =                 Rs 100

Here total market capitalization of the company is 10,000 X Rs100 =Rs 10,00,000 and

Free float market capitalization of the company is  3000 X Rs100 =Rs 300,000

According to the rules of BSE any shares which do not fall under the following categories are considered as free float (open market) shares.

•         Government holding shares as promoters
•         Holdings by Directors/ Founders
•         Holdings through the FDI route
•         Stakes held by private corporate bodies or individuals.
•         Any cross holdings i.e. equity held by associate or group companies.
•         Equity held by employee welfare trust.

Calculation of the free float factors

Periodically, every listed company has to submit holdings information i.e. who all are holding the shares of the company, to the exchange. Based on this free float factor for each company is calculated.

 Free float factor = No of shares available for trading in the open market / Total No of outstanding shares of the company.

Free float factor of each company has to be rounded of to the higher multiple of 5 and company is considered among one of the free float range.

Free Float ranges

 % Free-Float Free-Float Factor % Free-Float Free-Float Factor >0 – 5% 0.05 >50 – 55% 0.55 >5 – 10% 0.10 >55 – 60% 0.60 >10 – 15% 0.15 >60 – 65% 0.65 >15 – 20% 0.20 >65 – 70% 0.70 >20 – 25% 0.25 >70 – 75% 0.75 >25 – 30% 0.30 >75 – 80% 0.80 >30 – 35% 0.35 >80 – 85% 0.85 >35 – 40% 0.40 >85 – 90% 0.90 >40 – 45% 0.45 >90 – 95% 0.95 >45 – 50% 0.50 >95 – 100% 1.00

Calculation of SENSEX and NIFTY

Sensex calculation is practiced since 1986. Initially it had been calculated using total market capitalization method but the methodology changed to free float market capitalization since from 2003. Hence these days Sensex is calculated using free float market capitalization of 30 major BSE listed companies and by using base value 100 (1978-79). SENSEX is calculated for every 15 seconds.

Formula for Sensex

 SENSEX = (sum of free float market cap of 30 major companies of BSE)  X  Index value in 1978-79 / Market cap value in 1978-79.

Example:

Suppose BSE index (SENSEX) consist of only two stocks such as ‘X’ and ‘Y’

Company ‘X’ has 10000 outstanding shares out of which only 5000 are available for trading in open market. Market price of share is Rs.100.

Company ‘Y’ has 5000 outstanding shares out of which 2000 shares are held by promoters and remaining 3000 are free float shares (open market shares). Market price of share is Rs.10.

Calculation of Market Capitalization

 Stock Issued Stocks Market price Market Cap. X 10000 100 1000000 Y 5000 50 250000

Calculation of Free Float market capitalization

 Stock Open Market Stocks Market price Market Cap. X 5000 100 500000 Y 2000 50 100000

Here;

Sum of free float market cap of company X and company Y is 500000+100000 = 600000

Assume market cap during 1978-79 is 500000

Now Apply formula;

600000*100/500000 = 120

The same method is used to calculate NSE nifty but includes two major changes.

•      Base year is 1995 and base value (index value) is 1000
•      Nifty represents stocks of 50 major companies of NSE.

Formula for NIFTY

 NIFTY = (Sum of free flow market cap of 50 major stocks of NSE)  X   Index value in 1995 / market cap value in 1995.

Thanks and Regards,

CS Srikanta Kumar Pattanayak..

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