What is the Sensex and How is it Calculated?
You may have come across the phrases, “BSE reaches an all-time high,” or “Bombay Stock Exchange sees a historical fall,” on newspapers and television channels. Ever wondered what’s BSE and why the nation’s economic activity depends on it? Find out how it is calculated and why the value is important.
Here, in today’s guide, you can find all about the methodology employed to calculate the BSE index, so you can gain a better understanding of it and its role, in determining our economic progress.
What is BSE? – An Introduction
The BSE 30 is an index that reflects the performance of the Bombay Stock Exchange (BSE), one of the two most significant stock exchanges in the country. The BSE was established over a hundred years ago in 1875. The official index of the BSE was introduced only on 1st Jan 1986. It is used to gauge the performance of Indian stock markets.
Apart from BSE 30, the other main index used in India is the Nifty 50, the barometer of the National Stock Exchange (NSE).
The exchange comprises of 30 significant stocks from across various sectors. These stocks are actively traded on the BSE and belong to prominent and established companies, whose shares perform well.
How is it Calculated?
Most major financial indices around the world are calculated using the “Free Market Capitalisation” methodology. The BSE too employs this popular and globally accepted methodology. The value of the BSE depends on the performance of the 30 key stocks.
What is Free-float Market Capitalisation?
This denotes the number of total shares issued by a company that is available for trading. This value doesn’t include locked-in shares like strategic holdings, government holding, and promoters holding, that don’t come into the market for regular trading.
To explain it simply, free-float market capitalisation represents the total number of shares available to the general public for trading.
Let’s illustrate this with an example.
Assume a company X has 500 shares in total. Of these 500, 100 are locked-in shares, and only the remaining 400 shares are available for general trading. These 400 shares are known as the “free-floating” shares of the company. Let’s assume that each share costs 100 INR.
- Market capitalisation of Company X is = 500 * 100 = 50000 INR
- Free-float capitalisation = 400 * 100 = 40000 INR
Now, that you’ve understood free-float capitalisation, let’s take a look at BSE calculation:
Steps involved in BSE index Calculation
- The market capitalisation of the 30 companies in the BSE is determined. This number is reached by multiplying the current price of the share with the total shares issued by the company.
- The market capitalisation value is then multiplied with the free-float factor to determine the free-float market capitalisation. The free-float factor of each company is determined by the BSE, and its value usually ranges from 0.05 to 1.00. For instance, if a particular company is assigned a free-float factor of 0.50, it means that only 50% of the market capitalisation of that company is considered for Sensex calculation.
- The free-float market capitalisation of each company calculated in the previous step is divided by the Index Divisor. The index divisor provides the comparison of the index value over a period of time. For BSE, the base value is from the value used in 1978-79.
BSE Formula = (Total free-float market capitalisation / Base market capitalisation) * Base index value.
As you can see, the BSE 30 value depends on the performance of the 30 key companies in it. It serves as an indicator of the economic stability and progress of the country. The Sensex falls when there is a drop in economic activity and moves up when the country is on a growth path.