*In a previous write up I gave a brief look of what sensex is all about. Now I would talk about the methodology that is followed in calculating sensex.
There are, basically, two methods of arriving at sensex figure i.e. market capitalization method and free- float market capitalization method which is internationally in operation e.g. FTSE, S& P etc use the second method, as is used in our country, to arrive at the sensex figure.
Before knowing the methods, we must know some terminologies used in calculating sensex.
Market capitalization: - This is the product of total numbers of diluted shares in the market and the prevailing market price of the scrip.
For example, if the scrip price of ABC Ltd. is Rs. 2000/ share and total numbers of shares available is 100, 000, its market capitalization will be Rs. 200, 000, 000.
Free- float market capitalization: - Some times shares of organizations are held by its founders, FIIs etc. These are not available in the market for trading. So these shares are not the part of the free- float market capitalization. Now, depending upon various factors the amount of free float market shares are calculated and then free- float factor is determined e.g. if 60% of the scrip are free for trading the free- float factor will be 0.6 which signifies that 60% of the market capitalization will be considered for calculating free- float market capitalization.
For example, in the earlier case, considering a free float factor of 0.6 the free float market capitalization will be-
Rs. 200, 000, 000 * 0.6= Rs. 120, 000, 000
Now, with this understanding, we will move to know the hard core rule of calculating sensex. I t has 3 steps-
1) Calculate the free- float market capitalization of each company.
2) Add them up, for sensex 30 such figures are to be added.
3) Now, apply unitary method of 5th standard or which is, in other words termed as, relative weight age method.
For example, if the total free- float market capitalization for a point of time is Rs. 40, 000, 000, 000 and when the same figure was 32, 000, 000, 000, sensex was 10, 000 then now sensex will be 12, 500(10, 000 * Rs. 40, 000, 000, 000/ Rs. 32, 000, 000, 000).
Now, I think, if you get the exact figures as to free- float market capitalization(FFMC), you can calculate sensex at that point of time. As scrip prices keep changing, FFMC also changes and so do sensex. This is why online sensex in calculated every 15 seconds.
Comments are highly sought for development.