[Economy Q] SENSEX calculation

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Before venturing into SENSEX calculation, lets refresh basic concepts of Index calculation, that we saw in WPI calculation

Suppose Price of a Lifebouy soap was Rs.10 in 2001.
And now it has increased to Rs.12 per bar.

We take 2001 as our base year.
We take Rs. 10 as our base price.
Then our index for 2001,
= Price of soap in 2001 divided by price of soap in 2001
=(10/10) x 100= 100%

Our index for 2011
=Price of soap in 2011 divided by price of soap in 2001
=(12/10) x 100=120%

The formula is essentially, “new price divided by old price”

Now for SENSEX

Base year : 1978-79 [to be specific, the price on 1st April 1979]
First the concept of-

Free Float market Capitalization

1.    Kingfisher: suppose has total 1 lakh shares: 30,000 held by Malya and rest 70 thousand held by general public.
2.    Value of each share in Bombay Stock Exchange (BSE) on 11 January 2012 is Rs. 150.

Now we first calculate a thing called “Free float Market capitalization” for Kingfisher, which is nothing but
= Number of shares held by general public multiplied with Value of Each share on the given date in Bombay Stock Exchange (BSE)
= 70 thousand x 150
= 105 lakh rupees
So Kingfisher’s Free float Market cap (FFMC) for 11 January 2012= 105 lakh rupees.

Like this kingfisher, you pick up total 30 companies, calculate their FFMCs, add them together.This number becomes our  “Price of lifebuoy”, say it is 15 crore rupees. (NEW PRICE)

And total Free floating market cap of 30 companies, on that 1st april 1979 was say 10 lakh rupees. (OLD PRICE)

So as we saw earlier, INDEX= new price divided by old price (% value)

Now SENSEX = Total Free float market cap (FFMC) of 30 companies today divided by Total (FFMC) of 30 companies on 1st April 1979
=(15 crores / 10 lakh) x 100
=15000
This 15,000 my friends, is the today’s SENSEX.

P.S. Actual formula not this linear.

Some points

  • The 30 companies, in that list keeps changing. So 30 companies in today’s SENSEX not necessarily included in 1979’s list. But we take their values.
  • Actual SENSEX calculation involves minute technical-items such as “free float factor for each company” but it’s beyond the scope of routine competitive exams. However curious souls can access it by clicking following http://www.ehow.com/how_5184590_calculate-sensex.html
  • Different companies have different ‘weights‘ in the Index. So calculation won’t be directly new price by old price but weighted average, similar to how in WPI we assigned weights to different commodities.
  • Total market capitalization =total number of shares of a company (i.e. Malya+General public) multiplied with price of each share on given date.
  • SENSEX from 1986 to 2003, was calculated on this Total market capitalization. In 2003, they switched to Free Float Market Cap.
  • The word SENSEX is  made by combining two words: Sensitive + Index.

Dollex

  • BSE’s dollar version of SENSEX.  [SENSEX is calculated on rupee values]

NIFTY

  • SENSEX is calculated on 30 chosen companies. (Started in 1986)
  • NIFTY is calculated on 50 chosen companies. (Started in 1995), otherwise method is same.
  • Similarly BSE 100= calculated on 100 companies, since 1989.
  • PS: “years and dates” are not that important.

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