In the last post we understood the meaning of BSE Sensex and its uses. In this post let’s understand how to calculate Sensex.
Continuing our analogy with Indian cricket team, we can understand how the companies are selected for Sensex.
As you know well, players are selected to the Indian team based on various factors such as their performance in the domestic cricket, suitability to the current tournament etc. They are also selected by different categories such as batsman, bowler and wicket keeper.
Similarly, companies are selected to Sensex from different sectors such banking, IT, Consumer goods etc
But how the performance of a company is measured?
Let us introduce a term called “Market Capitalization”. If you are very new to market, it is very important to understand that, a company whose shares are trading at Rs 1000 may not be bigger or more valued than another company trading at Rs50. Value and Price are totally different. You should also consider the number of shares issued by both the companies.
.How do we calculate the market capitalization of a company?
.Just multiply the current share price with the number of shares issues by the company. With this you can compare value of two companies.
We have shown the Market capitalization of Reliance and Maruti by taking the data from BSE website.
Sl No Name of the Company Current Share Price Number of Shares (Lakhs) Market Capitalization (Crores)
1 Reliance 919 323 297491
2 Maruti 3516 30 106227
As you can see even though share price of Maruti is much higher, as you are aware reliance is much bigger and valued than the Maruti.
But out of 323Lakhs shares of Reliance, some quantities are held by promoters and government etc. The remaining shares are called “Free float”.
Don’t get confused by the fancy word. Just understand that Free float is nothing but the number of shares available for general public to buy/sell on the exchanges.
Now if we calculate the market capitalization using Free float, it is called Free float market capitalization. As simple as that!.
Following table displays the Free Float Market Capitalization data of two companies, which we have taken again from BSE website.
Sl No Name of the Company Current Share Price Market Capitalization (Crores) Free Float market Capitalization (Crores)
1 Reliance 919 297491 163904
2 Maruti 3516 106227 47701
Like this, Free Float Market Capitalization is calculated for all the 5000 odd companies listed on the BSE and top 30 companies make it to the Sensex.
Now we understood the team structure, but we need to arrive at the line up right?. Who is the Captain, Opening Batsman etc.
Drawing parallel, all the companies in Sensex will not have same weightage. Depending on the Free Float Market Cap, each company is assigned with weightage percentage. Higher the Free Float Market cap, higher the weightage.
We have calculated the weightage of each company in the following table.
Sr No Company Name Free Float Market Cap (Cr) Weightage
Sensex FFMC 2429413 100.00%
1 INFY 218122 8.98%
2 ITC 208569 8.59%
3 HDFCBANK 205499 8.46%
4 HDFC 198909 8.19%
5 ICICIBANK 193543 7.97%
6 RELIANCE 163904 6.75%
7 TCS 151555 6.24%
8 LT 140793 5.80%
9 TATAMOTORS 105061 4.32%
10 AXISBANK 97791 4.03%
11 SBIN 97243 4.00%
12 SUNPHARMA 78498 3.23%
13 ONGC 76250 3.14%
14 HINDUNILVR 68826 2.83%
15 M&M 53552 2.20%
16 BHARTIARTL 51521 2.12%
17 WIPRO 48087 1.98%
18 MARUTI 47701 1.96%
19 DRREDDY 39602 1.63%
20 HEROMOTOCO 36187 1.49%
21 CIPLA 35263 1.45%
22 NTPC 34383 1.42%
23 COALINDIA 34297 1.41%
24 BAJAJ-AUTO 32351 1.33%
25 BHEL 26458 1.09%
26 TATASTEEL 25205 1.04%
27 SSLT 24796 1.02%
28 GAIL 20917 0.86%
29 HINDALCO 19771 0.81%
30 TATAPOWER 15477 0.64%
You can also find the live value of Free Float Market Capitalization of Sensex here.
But Hey, You still haven’t explained how BSE Sensex is calculated?!
Value of the sensex can be calculated using the formula.
Sensex = (Free Float market Cap/Base Value) X 100 (a)
All the terms in above formula are known except “Base Value”, isn’t it?
BSE keeps adjusting the Base Value since companies do change in Sensex and because of special events like bonus issue and right issue.
Base Value for the year 1978-79 was 100. (That means if you have invested Rs100 in sensex in 1978-79, you money would have grown to present value of the sensex!).
But now the problem is BSE does not publish the current Base Value. So let’s do reverse calculation using the current Sensex value of 28835 using the above formula.
Base Price = (FFMC / Sensex) *100 = (2429413/28835) *100 Base Price = 8425.23
Now you can calculate the value of the Sensex any time using this Base value in formula (a) until BSE changes it!
Just to summarize the steps on How Sensex is Calculated:
1) Find out the outstanding shares of the company
2) Derive the Free Float market Capitalization by multiplying the number of outstanding shares with current price
3) Sort and select the top 30 companies with highest Free Float Market Capitalization
4) Add Free Float Market Capitalization of individual 30 companies
5) Divide the by the Base Price and then multiply by 100 to arrive at value of Sensex
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