How is Sensex Calculated? || History of Sensex (BSE)?
What is the Free-float market capitalization?
Free float stands for the shares that are open for trading. All shares may not be Free-floating. The Free-floating market capitalization is calculated by taking the equities price and multiplying it by the number of shares readily available in the market.
What is Market Capitalization?
Market capitalization refers to the total dollar market value of a company’s outstanding shares. It is the combined worth of all the stocks of different companies within stock exchanges. This market capitalization is again multiplied by the free float factor to determine the free-float market capitalization. Market capitalization is one of the most important characteristics. That helps the investor determine the returns and the risk in the share. It also helps the Investor choose the stock. That can meet their risk and diversification criterion. Sensex is Calculated
How Sensex Works Example:
Suppose the index has two companies – A & B.
Company A has 1000 shares out of which 700 are free-floating or available for the general public to buy and sell. The price of each share is Rs.70.
Company B has 500 shares out of which 300 are free-floating. The price of each share is Rs.90
Market capital of Company A = 70000
Market capital of company B = 45000
Free-float factor for company A = 0.70
Free-float factor for company B = 0.60
Total free-float market capital of the index =
(Market capital of Company A*Free-float factor company A) + (Market capital of company B*Free-float factor company B)
(70000*0.70) + (45000*0.60) = 76000
Let us assume the base year index was 5000.
Value of Index = (Total free-float market capital of the index * 100) /Base year index
So the Value of the Index is 1520.
The Same Example can be applied to how Nifty Calculated.