Indian Index

As I have already explained in my previous post, how to calculate Sensex & Nifty. Now I will explain the same by taking an example

As on Feb 8 2011

SENSEX

Free float market capitalization = 1347365 Cr

Index Value = 100

Index market capitalization value in base year =7579 Cr ( Approx )

SENSEX = 13473650000000 * 100 / 75790000000

= 17777.6o

NIFTY

Free float market capitalization = 1565788 Cr

Index Value = 1000

Index market capitalization value in base year = 294764 Cr ( Approx )

NIFTY = 15657880000000 * 1000 / 2947640000000

= 5312.55

Index Calculation

I will be explaining how to calculate Index Value of Indian Stock exchanges. There are many ways to calculate Index value. They are

1. Free float Market Capitalization
2. Market Capitalization Weighted Average
3. Price Weighted Average

In India the method followed to calculate Index value is Free Float Market capitalization.

Free Float Market Capitalization

A Free float based index is regarded as a better benchmark and superior as it reflects the market trends in a more rational manner in comparision to a full market capitalization weighted index.

Free Float Market Capitalization as the name suggest it has two parts

• Free Float

This can be defined as the proportion of the total shares issued by the company which are readily avaliable for trading in the market.

According to BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market/free float shares:

• Holdings by founders/directors/acquirers who has control element
• Holdings by persons/bodies with controlling interest
• Government holding as promoter/acquirer
• Holding through the FDI route
• Strategic stakes by private corporate bodies/individuals
• Equity held by employee welfare trust
• Locked in shares

A company has to submit a complete report about "who has how many of the company's shares" to the BSE.

• Market Capitalization

The market capitalization of a company means is simply multiply current market price of each share by number of outstanding shares issued by the company.

Market Capitalization = Current market price * No. of shares traded in stock market

Depending on the value of the market cap, the company will either be a "Mid-cap" or "Large-cap" or "Small-cap" company.

Free float market capitalization = Free float * Market Cap

Now we will calculate Sensex

1. Find out the "free float market cap" of all 30 companies
2. Add all the "free float market cap's of all the 30 companies
3. Make all this relative to the Sensex base. The value you get is the Sensex value.

Sensex = Sum of free float market capitalization of 30 stocks of BSE * Index Value ( 100 ) /market capitalization value of base year

NIFTY = Sum of free float market capitalization of 50 stocks of NSE * Index Value ( 1000) / Market capitalization value of base year

Important Indices in the World