Sensex or S&P BSE Sensex is an index or an indicator of Bombay Stock Exchange (BSE) that indicates the movement of stocks (largest & most actively traded one`s in the BSE) movement towards up or down. If the Sensex is moving up, it reflects that the stock price of the most of the companies in BSE have gone up and if the Sensex goes down then it reflects that the stock price of the most of the companies in BSE have gone down.
Sensex, since its launch from 1st January 1986 is regarded as a heart-beat of the Indian stock market; it is one of the oldest stock exchanges and designed in a manner that it reflects the trend of an overall market. It comprised of 30 largest stocks which are selected based on the below mention qualitative & quantitative criteria’s or parameters:
- Stock`s Market Capitalization
- Stock`s Trading Frequency
- Number of trades in a stock
- Stock`s Industry representation
- Stock`s Track Record
- Listed history of the stock
How Sensex is constructed:
The value of the Sensex on a daily basis has been calculated by taking into the account of the market capitalization of the 30 listed companies in BSE, let us explain it with the help of an example.
Let’s assume the Sensex is currently at 20000 and there are 2 companies traded on a BSE- ABC & XYZ. ABC`s share current market price is 200 and has 10000 outstanding shares while XYZ`s share current market price is 500 and has 7500 outstanding shares, so the total market capitalization is (200*10000) + (500*7500) 57.50 lakh.
Now assume that tomorrow, the price of ABC shoots up to 250 which is 25% more from its last day price and XYZ comes down to 450 which is 10% less than from its last day price, in this case the market capitalization for the new day comes out to be 58.75 lakh which means the market capitalization has moved up by 2.17% due to change in prices of both the stocks. Hence the Sensex will move to 20434 which is 2.17% from 20000.
This is how the index moves every minute with this calculation by extended the same logic to the selected stocks.
It is important to understand the meaning of Free float market capitalization of the stock as this is one which used in the above calculation instead of market capitalization of the the stock
Free Float Methodology:
Free float market capitalization is a part of an overall market capitalization of the stock which is readily available in an open market for trading which means the share hold by the founder/promoter or by entities like FDI or Government are excluded from the overall market capitalization to arrive at the figure for free float market capitalization.
Suppose an XYZ company has 12000 shares in total, out of which 2000 are held by the promoter of XYZ and 1000 are held by FDI, so the remaining share of 9000 will be considered for the calculation of free float market capitalization, now if the current market price of XYZ is Rs 100 then its overall market capitalization is coming out to be Rs 12,00,000(12000*100) and free float market capitalization is coming out to be Rs 9,00,000(9000*100).