SENSEX(SENSitivity indEX) is a measure of performance of our stock market. Sensex was started with an arbitrary number 100 on Jan 1 1979.
Ever wondered what this index represents ?
Sensex is computed from the performance of 30 of the biggest companies of India.And the rise and fall of this companies is directly proportional to the rise and fall of Sensex. If these 30 top companies cumulatively grow by X% then Sensex will also rise X%.So this index depicts the health of our economy.
And how this index value is calculated?
Free floating market capitalization method is used for this purpose.Suppose we have 2 companies,Co A and Co B-
Co A has 100 shares out of which 90 are available for general public (called free floating shares) and 10 are owned by company management. Each share is valued at Rs 100.
Co B has 1000 shares out of which 800 are available for public and 200 for company management.Each share is valued at Rs 10.
Co A has a total value=Total market capitalization =total no of shares*value of each share=100*100=Rs 10000
Co B has a total value =Total market capitalization=total no of shares*value of each share=1000*10=Rs 10000
Co A has a total free floating value=Total free floating capitalization=total no free floating shares*value of each share=90*100=Rs 9000
Co B has a total free floating value=Total free floating capitalization=total no free floating shares*value of each share=800*10=Rs 8000
So the total free floating capitalization adds up to=9000+8000=Rs 17000(of A and B)
Now suppose we say that the amount of 17000 is equal to 100 Sensex point for reference then we calculate the Sensex points with this point based on the gain/loss of the company.
So now if these 2 companies free floating capitalization becomes 170000 in 20 years, then Sensex will indicate 1000 .
Similarly for a list of 30 companies in BSE which include-ACC, Ambuja Cements, Bajaj Auto, BHEL, Bharti Airtel, Cipla, DLF, Grasim Industries, HDFC, HDFC Bank, Hindalco Industries, Hindustan Lever, ICICI Bank, Infosys, ITC, Larsen & Toubro, Mahindra & Mahindra, Maruti Udyog, NTPC, ONGC, Ranbaxy Laboratories, Reliance Communications, Reliance Energy, Reliance Industries, Satyam Computer Services, State Bank of India, Tata Consultancy Services, Tata Motors, Tata Steel, and Wipro.
We simply cumulate free floating capitalization of all these 30 companies with a base point of 100 Base Index for ease with financial year 1978–79 as reference.