The Sensex was introduced by Bombay Stock Exchange
in the year 1986. It stands for “Sensitive Index” covering 30 stocks across different sectors. Sensex is used as a benchmark for price movements of the stock portfolio. The stocks in the portfolio are selected based on the eligibility criteria.
The Nifty was introduced by National Stock Exchange in the year. It covers approx. 24 sectors of the economy in this index. It uses 1995 as the base year with 1000 as the base index value. In NSE
there are around 1500 stocks traded.
Like the other world indices Sensex and Nifty has also shifted to “Free Float Capitalization
” Method to derive the value with effect from September 1, 2003. The performance of the 30 stocks will have a direct impact on the levels of Sensex.
Criteria’s for entering into Sensex:
- Listing History
- Track Record
- Market Capitalization
- Frequency of Trading
Before understanding the methodology of Calculation of Free Float Capitalisation lets understand what does Free Float mean?
A free Float Method is an index construction method which only considers that shares which are tradeable, which means it excludes all that shares which are held by promotors, government which cannot be traded in the stock exchange.
These shares therefore are called free float shares which are available in the open market to be traded.
To Construct an Index these steps, need to be followed:
Step 1: Calculate the Market Capitalization of all 30 stocks by multiplying the no of outstanding shares with current market price.
Step 2: The market Capitalization is then multiplied to the free float factor to derive at the free float market capitalization. (The free float factor varies from 0.05 to 1. The free float factor is the multiple with which the market capitalization of the company is adjusted to arrive at its free float market capitalization. The Free float factor of 0.35 means that company has 35% shares available for trading in open market.)
Step 3: The Free Float market capitalization of index constituents is then divided by the index divisor. The index divisor is the present level of index.
The formula for free float Market capitalization is:
For Sensex, The Base year is taken as 1978-79 and The base value as 100
For Nifty, The Base year is taken as 1995 and The base value as 1000
Let us take an example with respect to the calculation of SENSEX:
Consider there are only two companies in the Sensex
Co A Ltd, Co B Ltd.
Company A has 500 shares of 1,000 each amounting to Rs.5,00,000/- the total value of the company and has only 20% available to public to trade. The free float for the company would be 20/100 or .20 Therefore, free float value would be 5,00,000 *.20 = Rs.1,00,000/-.
Company B has 800 shares of 1,000 each amounting to Rs.8,00,000/- the total value of the company and has only 70% available to public to trade. The free float for company B would be 70/100 or .70
Therefore, free float value would be 8,00,000 *.70 = Rs.5,60,000/-.
Assuming Market Cap during 1978-79 would be 30000
Sum of Free float of Co A and B = 1,00,000 + 5,60,000 = 6,60,000/-
Sensex = 6,60,000 * (100/30000) = Rs. 2,200/-