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Stock market is a place where majority of people are interested in. I have got thousands of queries related to Index calculation (Sensex & NIFTY). In this article I have tried to explain the calculation of Index. Stock market is a place where one can make huge money. At the same time the possibility of losing money is also very high. Before trading one should have a clear idea about the market like how it works, how trading is done, what are the factors to be considered while trading, etc. This article will help you to understand about the free float market capitalization and Index calculation technique.
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.
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.
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.
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 Factor
0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50
% Free-Float
>50 55% >55 60% >60 65% >65 70% >70 75% >75 80% >80 85% >85 90% >90 95% >95 100%
Free-Float Factor
0.55 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00
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 X Y
Stock X Y
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.
NIFTY = (Sum of free flow market cap of 50 major stocks of NSE) X Index value in 1995 / market cap value in 1995. Formula for NIFTY