Easy Way To Understand Nifty & Sensex Calculation

CA Deepak Rathore

Calculation 

Sensex is calculated using the “Free-float Market Capitalization” methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market Capitalization.

The base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.

What is Free-float Market Capitalization –

any different types of investors hold the shares of a company. The Govt. may hold some of the shares. Some of the shares may be held by the “founders” or “directors” of the company. Some of the shares may be held by the FDI’s etc. Now, only the “open market” shares that are free for trading by anyone, are called the “free-float” shares. When we are calculating the Sensex, we are interested in these “free-float” shares!
A particular company, may have certain shares in the open market and certain shares that are not available for trading in the open market.

Shareholdings of investors that would not, in the normal course, come into the open market for trading are treated as ‘Controlling/ Strategic Holdings’ and hence not included in free-float. Specifically, the following categories of holding are generally excluded from the definition of Free-float:

• Shares held by founders/directors/acquirers which has control element
• Shares held by persons/ bodies with “Controlling Interest”
• Shares held by Government as promoter/acquirer
• Holdings through the FDI Route
• Strategic stakes by private corporate bodies/ individuals
• Equity held by associate/group companies (cross-holdings)
• Equity held by Employee Welfare Trusts
• Locked-in shares and shares which would not be sold in the open market in normal course.

EXAMPLE;
Sample taken From The Economic time as regarding Price of Shares as to understand the calculation easily we have assume Free float 75% for each company ie 25% share held by Founder ,director ,promoter etc

The formula to calculate the Sensex is as follows:
(Sum of Free Float Market Capitalization / Base Market Capital ) x 100
Given:
Sum of Free Float Market Capital=20148.90
base period of Sensex is 1978-79=100(As Discuss above)
So we get=20148.90*100/100
=20148.90 Sensex

NIFTY CALCULATION

Just like the Sensex which was introduced by the Bombay stock exchange, Nifty is a major stock index in India introduced by the National stock exchange.

NIFTY was coined fro the two words ‘National’ and ‘FIFTY’.  The word fifty is used because; the index consists of 50 actively traded stocks from various sectors.

the Nifty is a market capitalization weighted index also based on the Free Float Method. They involve the total market capitalization of the companies weighted by their effect on the index, so the larger stocks would make more of a difference to the index as compared to a smaller market cap company.

Nifty is calculated using the same methodology adopted by the BSE in calculating the Sensex – but with three differences. They are:

• The base year is taken as 1995
• The base value is set to 1000
• Nifty is calculated on 50 stocks actively traded in the NSE
• 50 top stocks are selected from 24 sectors.

Hope You will understand