1. Understanding how the Sensex is calculated
Definition:
The base periodof Sensexis1978-79 andthe base value is100 index points.Thisisoftenindicatedby
the notation1978-79=100. The calculation of Sensexinvolvesdividingthe Free-floatmarket
capitalizationof 30 companiesinthe Index byanumbercalledthe Index Divisor.
Introduction:
Thisarticle explainshowthe value of the “BSESensex”or“sensitive index”iscalculated.If youare not
sure what we meanbythe Sensex orwhatthe Sensex isall about,youcan findthisoutby readingour
“How to make moneyinthe stockmarket?” article.
The Sensex hasa veryimportantfunction.The Sensex issupposedtobe an indicatorof the stocksin the
BSE. It issupposedtoshowwhetherthe stocksare generallygoingup,orgenerallygoingdown.
To showthisaccurately,the Sensex iscalculatedtakingintoconsiderationstockpricesof 30 different
BSE listedcompanies.Itiscalculatedusingthe “free-floatmarketcapitalization”method.Thisisaworld
wide acceptedmethodasone of the bestmethodsforcalculatingastock marketindex.
Please note:The methodusedforcalculatingthe Sensex and the 30 companiesthatare takeninto
considerationare changedfromtime totime.Thisisdone tomake the Sensex anaccurate index andso
that itrepresentsthe BSEstocks properly.
To reallyunderstandhowthe Sensexiscalculated,yousimplyneedtounderstandwhatthe term“free-
floatmarketcapitalization”means.(Aswe saidearlier,the Sensex iscalculatedonbasisof the “free-
floatmarketcapitalization”method) But,beforewe understandwhat“free-floatmarketcapitalization”
means,youfirstneedtounderstandwhat“marketcapitalization”means.
You probablythinkthatyouhave neverheardof the term“marketcapitalization”before.Youhave!
Whenyouare talkingabout“mid-cap”,“small-cap”and“large-cap”stocks,youare talkingaboutmarket
capitalization!
Market cap or marketcapitalizationissimplythe worthof acompanyinterms of it’sshares!To put itin
a simple way,if youwere tobuyall the sharesof a particularcompany,whatisthe amountyou would
have to pay?That amountiscalledthe “marketcapitalization”!
To calculate the marketcap of a particularcompany,simplymultiplythe “currentshare price”bythe
“numberof sharesissuedbythe company”!Justto give youan idea,ONGC,has a marketcap of

2. “Rs.170,705.21 Cr” (when thisarticle waswritten)
Dependingonthe value of the marketcap,the company will eitherbe a“mid-cap”or “large-cap”or
“small-cap”company!Nowthe questionis,how doYOU calculate the marketcap of a particular
company?You don’t!Justgo to a website likeMoneyControl.com andlookupthe companywhose
marketcap you are interestedinfindingout!The figure infrontof “Mkt. Cap” will be the marketcap
value.
Havingseenwhatmarketcap is andhow to findoutthe marketcap of a particularcompany,letus try to
understandthe conceptof “free-floatmarketcap”
whole nation is obsessed with the rise and fall of the Sensex whether or not people are directly or
indirectly associated with it. With the increase in economic activity in the nation, the Sensex has
become a household term keenly followed by millions each day. But the methodology employed
to calculate the Sensex is known to very few people.
Understanding Sensex
The Sensex is primarily an index reflecting the Bombay Stock Exchange (BSE). Established in
1875, the stock exchange did not have an official index till Jan 1, 1986 when the Sensex was
adopted for gauging the performance of the Indian markets. The other important index in India is
the National Stock Exchange (NSE) barometer -- the Nifty. The Sensex comprises of 30
prominent stocks derived from all key sectors which are traded actively in the exchange. Thus,
the Sensex truly reflects the movement of the Indian stock markets.
Calculation Methodology for Sensex
Like the other major financial indexes of the world, the Sensex has also shifted to the 'Free Float
market capitalization' methodology to determine its figures with effect from September 1, 2003.
The level of the index is a direct reflection of the performance of the 30 selected key stocks in
the market.
Free-float market capitalization is defined as that proportion of total shares issued by the
company that are readily available for trading in the market. It generally excludes promoters'
holding, government holding, strategic holding and other locked-in shares that will not come to
the market for trading in the normal course. So, simply put, Free-float market capitalization is the
proportion of total shares available for trading to the general public.

3. Note: Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so
that only 800 shares are available for trading to the general public. These 800 shares are the so-
called 'free-floating' shares. If the price of each share is 120 rupees, then the 'total' market
capitalization of the company is 120,000 rupees (1,000 x 120), but its free-float market
capitalization is 96,000 rupees (800 x 120).
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Sensex is calculated through the following steps:
1. The market capitalization of each of the 30 companies comprising the index is first determined
by multiplying the price of their stocks with the number of shares issued by that company.
2. The market capitalization is then multiplied to the free-float factor to derive the free-float
market capitalization. (The free-float factor of a company is the multiple with which the total
market capitalization of that company is adjusted to arrive at its free-float market capitalization.
It is determined by the BSE based on the information submitted by the companies. The value of
the free-float factor lies between 0.05 and 1.00. A free-float factor of say 0.55 means that only 55
pct of the market capitalization of the company will be considered for index calculation.)
3. The free-float market capitalization of the Index constituents is then divided by a number
known as the Index Divisor. This index divisor is the sole link to the original base period value
of the index. (For the Sensex, the base value period, it is 1978-79) This value provides for
comparison of the index over a period of time.
For example, if the days' Market Capitalization based on the performance of the 30 key stocks is
8060000 and the base index of 1978-79 is 60000. The index divisor becomes 100/60000 and the
Sensex index value equals 8060000 x 100/60000 = 13433 for that day.
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What is Sensex? How is it calculated?
SENSEX
The SENSEX-(or SENSitve indEX) was introduced by the Bombay stock exchange on January 1
1986. It is one of the prominent stock market indexes in India. The Sensex is designed to reflect
the overall market sentiments. It comprises of 30 stocks. These are large, well-established and
financially sound companies from main sectors.
METHOD ADOPTED FOR SENSEX CACULATION

4. The method adopted for calculating Sensex is the market capitalisation weighted method in
which weights are assigned according to the size of the company. Larger the size, higher the
weightage.
The base year of Sensex is 1978-79 and the base index value is set to 100 for that period.
WHY IS THE BASE VALUE SET TO 100 POINTS?
The total value of shares in the market at the time of index construction is assumed to be ’100′ in
terms of ‘points’. This is for the purpose of ease of calculation and to logically represent the
change in terms of percentage. So, next day, if the market capitalization moves up 10%, the
index also moves 10% to 110.
HOW ARE THE STOCKS SELECTED?
The stocks are selected based on a lot of qualitative and quantitative criterias. You can view the
listing criteria here.
HOW IS THE INDEX CONSTRUCTED?
The construction technique of index is quite easy to understand if we assume that there is only
one stock in the market. In that case, the base value is set to 100 and let’s assume that the stock is
currently trading at 200. Tomorrow the price hits 260 (30% increase in price) so, the index will
move from 100 to 130 to indicate that 30% growth. Now let’s assume that on day 3, the stock
finishes at 208. That’s a 20% fall from 260. So, to indicate that fall, the Sensex will be corrected
from 130 to 104(20%fall).
As our second step to understand the index calculation, let us try to extend the same logic to two
stocks – A and B. A is trading at 200 and let’s assume that the second stock ‘B’ is trading at 150.
Since the Sensex follows the market capitalization weighted method, we have to find the market
capitalization (or size of the company- in terms of price) of the two companies and proportionate
weightage will have to be given in the calculation.
How do we compute size of the company- in terms of price?
 That’s simple. Just multiply the total number of shares of the company by the market
price. This figure is technically called ‘market capitalization’.
Back to our example-
We assume that company A has 100,000 shares outstanding and B has 200,000 shares
outstanding. Hence, the total market capitalization is (200 x 100000 + 150 x 200000) Rs 500
lakhs. This will be equivalent to 100 points.
Lets assume that tomorrow, the price of A hits 260 (30% increase in price) and the price of B hits
135. (10% drop in price). The market capitalization will have to be reworked. It would be – 260

5. x 100,000 + 135 x 200,000 = 530 lakhs. That means, due to the changes in price, the market
capitalization has moved from 500 lakhs to 530 indicating a 6% increase. Hence, the index
would move from 100 to 106 to indicate the net effect.
This logic is extended to many selected stocks and this calculation process is done every minute
and that’s how the index moves!
CALCULATION OF SENSEX.
What we said was the general method to construct indices. Since, the Sensex consists of 30 large
companies and since it’s shares may be held by the government or promoters etc, for the purpose
of calculating market capitalization only the free float market value is considered, instead of the
total number of shares.
What is free float?
 That’s the total number of shares available for the public to trade in the market. It
excludes shares held by promoters, governments or trusts, FDIs etc..
 To find the free float market value, the total value of the company (total shares x market
price) is further multiplied by a free float market value factor, which is nothing but the
percentage of free float shares of a particular company.
 So logically, the company which has more public holding will have the highest free float
factor in the Sensex. This equalizes everything.
 Example- let’s assume that the market value of a company is Rs 100,000 Crore and it has
100 Crore shares having a value of Rs 1,000 each but only 20% of it are available to the
public for trade. The free float factor would be 20/100 or 0.20 and the free float market
value would be .20 x 100,000 = 20,000 Crores.
 You need not calculate the free float market capitalization since its available straight on
the BSE website – Click this link to get it.
NOW, LET’S SE HOW THE SENSEX MOVES.
 Sensex value = Current free-float market value of constituents stocks/Index Divisor
So, the numerator is available straight from the BSE site. It’s the total of free float factors of 30
stocks x market capitalization.
NOW, THE DENOMINATOR.
The index divisor nothing but the present level of index.
So, now, we have all the figures.

6. Lets assume that the free-float market capitalisation is Rs 10,00,000 Crore. At that point, the
Sensex is at 12500. What would be the value of Sensex if the free-float market capitalization is
Rs 11,50,000 Crore?
Factors That Affect The Sensex Finance
Essay
Bombay Stock Exchange is the oldest exchange is the oldest stock exchange in Asia established
in 1875. The Bombay Stock Exchange has 4700 companies listed on its exchange. The BSE
index more commonly referred to as the SENSEX which stands for sensitive index. The
SENSEX was first established in January 1, 1986 which was calculated using Market
Capitalization-Weighted. The base year for SENSEX is 1978-1979 (BSE, 2009). It is the oldest
index in India and hence is famous worldwide. This index comprises of 30 companies from 12
major industries of India. The companies included in the SENSEX are regularly reviewed by the
authorities to check its composition reflects the present market scenario. Some of the companies
listed in the SENSEX are Reliance Industries Limited, Infosys, State Bank of India, Wipro,
Bharti Airtel, Larsen and Toubro, Hindustan Unilever, Oil and Natural Gas Corporation, Tata
Steel, Tata Consultancy Services and ICICI Bank (BSE, 2009). Since 2003 the SENSEX is
calculated using the free float capitalization weighted method which differs from the market
capitalization method in the fact that it uses the shares of the company that is available for
trading and hence its excludes stock held by the government, promoters and institutional
investors. The free floating methodology is used by other world renowned indices providers such
as Standard & Poor (S&P), Dow Jones and Financial Times and the London Stock Exchange
(FTSE).
Factors That Affect the SENSEX
Various factors affect the shares prices of the companies which are used in the construction of
the SENSEX and also which are responsible for the volatility in the prices of the shares. They are
broadly classified into macro-economic and micro-economic factors,
Macroeconomic Factors
The following factors have been classified as macroeconomic factors:-
Global Market Trends
Government Stability & Economic Growth

7. Inflation
Interest Rates
Industry Growth
Crude Oil Prices
Exchange Rates
Global Market Trends
In this age of globalization where the economies of major countries such as the United States and
the European Union and are inter-related have an effect on the Stock markets. This due to the
fact that most of the foreign trade of the world economy is conducted with the United States,
European Union and emerging economies such as Brazil, Russia and China. Thus if these major
economies are growing at a healthy rate would have a positive effect on the Stock markets since
when there is positive growth the demand for goods imported from China, India and other
developing countries will increase in developed economies which have considerably higher the
rate of inflation will have an adverse affect on the SENSEX since the buying power of money
decreases considerably and also the increase in price of goods and services will affect the future
cash flows of companies. The inflation rate in an economy is controlled by the Reserve Bank
which reigns in inflation by increasing the interest rate and reducing the excessive supply of
money in the economy by issuing bonds and national savings certificates. Thus inflation is
controlled by the Reserve Bank by the monetary policy (C.Viney,2007).
Exchange Rates
The risk derived from the exchange rate is called foreign exchange rates. Since most of the
export contracts in India are priced in US dollars (USD) if the Indian rupees (INR) starts
appreciating the against the USD then the companies obligated by such export contract are
adversely affected. This is due to the fact that when the exporting converts the USD into INR
they could drastically reduce their profit margins and thus the future cash flows of the exporters
would be adversely affected which inturn would reflect in the share prices of the company and
thus adversely affect the Stock markets in a negative manner (C.Viney,2007).
Crude Oil Prices
An increase in crude oil prices have a tremendous impact on the economy as a whole since the
transportation cost for industries and also increase the rate of inflation. Also the fact that the
Indian government through its various companies would have to incur higher cost while
importing oil and meanwhile also providing subsidies to the general public when the oil prices
have increased drastically leads to losses for the government companies. Since it leads to
increase the cost of production which would affect the future cash flows of companies it would
have an adverse negative affect on the Stock Markets (C.Viney,2007).

8. Inflation
Inflation denotes the rise in price of goods. Inflation occurs when the supply of money in the
economy is excessive which leads too much money chasing to few goods and services which
leads to increase in prices of the goods and services. Inflation is commonly calculated using
consumer price index (CPI). The consumer price index (CPI) is used to measure the change in
prices of basket of selected goods and services. Thus the changes in the consumer price index
(CPI) over a period of time are used to measure the rate of inflation. Thus continuous increase
the rate of inflation will have an adverse affect on the SENSEX since the buying power of
money decreases considerably and also the increase in price of goods and services will affect the
future cash flows of companies. The inflation rate in an economy is controlled by the Reserve
Bank which reigns in inflation by increasing the interest rate and reducing the excessive supply
of money in the economy by issuing bonds and national savings certificates. Thus inflation is
controlled by the Reserve Bank by the monetary policy (C.Viney,2007).
Government Stability & Economic Growth
Government Stability is an important factor in India which can be seen from the fact that when
the United Progressive Alliance was re-elected with a clear majority in the parliamentary
election held in April- May 2009, the SENSEX gained 2000 pts in around 3 minutes of trading
and for the first time trading was suspended due to breaching of the circuit breaker twice in the
same day. The rate of growth of an economy is also important influencing factor on the stock
markets. A slow down in the economic growth rate of the economy also adversely affects the
stock markets of that particular economy (C.Viney,2007).
Current Account Balance of Payments
The current account of the government is the record of financial earnings which include the
exports and also the imports made by the particular government. It also has a record of income
earned by investments made overseas by the government. If the current account of the
government is in deficit that is if the income from exports is less than the imports than this can
lead to high levels of foreign debt for the government. Thus the government would slow down
the economy by the increasing the interest rates and also reducing expenditure. Therefore these
initiatives will have an adverse impact on the future cash flows of the company and thus have a
negative affect on the stock markets (C.Viney,2007).
Microeconomic Factors
The following microeconomic factors which affect the stock markets are as follows:-
Company information is an important factor which influences the share price of a particular
company which is evident from the fact when the accounting fraud was uncovered in Satyam the
share prices fell drastically (C.Viney,2007).

9. The business cycle also has an huge impact on the stock i.e. when economy is in boom the stock
markets will rise rapidly and when the economy is in recession the stock market would affected
negatively (C.Viney,2007).
Factors Affecting the Stock Price
The factors which affect the stock price of a particular company are as follows:-
Demand Supply
Profitability
Market Dynamics
Shareholders Perspective
Demand Supply
Demand and Supply is one of the most common methods used to determine the price of a
particular share since even there is high demand and low supply of the shares the price of the
share increases rapidly and is price of the share is low when the supply is high and demand is
low (C.Viney,2007).
Profitability
The price of a share is heavily influenced by the quarterly results announced by the company
every 3 months because it indicates how profitable the company is. If the company has been able
to post profits which are growing each quarter the demand for the shares of the company would
increase which in turn increase the price of the shares (C.Viney,2007).
Shareholders Perspectives
The markets are influenced by macroeconomic and microeconomic factors but the other factor
which heavily influence the markets are the sentiments of the investors which are influenced by
the information available about the companies listed on the stock exchange. Moreover investors
are also influenced by the actions of arbitragers, speculators and market makers in the stock
market (C.Viney,2007).
The market is often described as Bullish or Bearish which is the perspective of investors and is
explained below:-

10. Bull Market
In a bull market the view of the investor is that the prices of the shares will further increase ad
hence there is more inflow of money into the stock markets with the expectation that it would
rise further (C.Viney,2007).
Bear Market
In a bear market the view of the investor is that the prices of the shares will fall and hence there
is more outflow of money from the stock market since the investor would want to reduce their
losses.