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Sensex drops 170 points after Fed disappoints Street

By Vartika Garg (Hansraj Model School)

So here comes the questions, WHAT IS SENSEX and HOW THESE POINTS ARE CALCULATED.

For addressing the first question. Sensex is nothing but the index used by the Bombay Stock Exchange that was established in 1875. Till Jan1, 1986 the stock exchange did not have any official index. This was the time when Sensex was opted for determining the performance of the Indian market. The term SENSEX was named by a stock market analyst Mr. Deepak Mohoni, the word is a portmanteau of Sensitive and Index. The Sensex comprises of 30 prominent stocks which are derived from sectors and are traded actively in the exchange market. Sensex truly reflects the Indian stock market movement.

If the Sensex value increases, it means that there is a general increase in the prices of shares (BULLISH PHASE) whereas, if the Sensex decreases, it means there is a general decrease in the prices of shares (BEARISH PHASE).


For addressing the second question, here lies a detailed explanation. Historically Sensex used the weighted market capitalisation methodology, but from September 1, 2003, it shifted to FREE FLOAT MARKET CAPITALISATION methodology. The performance of the 30 selected key stocks directly reflects the level of the index.

FREE FLOAT MARKET CAPITALISATION = MARKET CAPITALISATION x FREE FLOAT FACTOR

Free Float is referred to as that % of the total shares issued by the company that is readily available for trading in the market. It excludes the shares that are held by the promoters, government, etc.

FOR INSTANCE:

If the company has 100 shares, in which 30 are held by the government or the promoters and the remaining 70 are available for trading to the general public then, those 70 shares are the free-floating shares and thus the free float factor will be 70%.

Market Capitalisation is determined by multiplying the price of a stock with the number of shares issued by that company.

FOR INSTANCE:

A company with 10 million shares selling for $100 each would have a market capitalisation of $1 billion.


The calculation of Sensex includes both the above-mentioned terms. Its process is explained as follows:

Since Sensex comprises of the 30 stocks which are selected according to the criteria set. The market capitalisation of all the 30 companies is determined. The free-float market capitalisation is summed up to get a total of all the free-float market capitalisation.

SENSEX= TOTAL FREE FLOAT MARKET CAPITALISATION x BASE INDEX VALUE/ BASE MARKET CAPITALISATION

The base year to calculate Sensex is 1978-79, the base value is static but it has to be changed. According to BSE Rs.2501.24cr is to be used as the base market capitalisation. The base index value is 100.