How is sensex calculated?

When I talk about Stock Market then first of all what came in our mind is SENSEX. I had heard this word many times in News Channel. When news anchor said sensex goes high and down. This question always hit me while reading newspapers . I could hardly understand what it meant

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What is Sensex ? (Click here to read complete article)
Sensitive Index or Sensex is the stock market index indicator for the BSE. 
In short we will say “Sensex is a index used to measure the performance of top 30 companies listed in BSE. If SENSEX goes upside that means prices of most of the BSE stocks has gone upside.”
Now the question is How is sensex calculated?

How is sensex calculated?
The calculation of Sensex is done by a Free-Float method, The free-float method takes into account the proportion of the shares that can be readily traded in the market. This does not include the ones held by various shareholders and promoters or other locked-in shares not available in the market.First, the market capitalization is taken into account. This is done by multiplying all the shares issued by the company with the price of its stock. Then BSE determines a Free-float factor that is a multiple of the market capitalization of the company. This helps in determining the free-float market capitalization based on the details submitted by the company. Then, Ratio and Proportion are used based on the base index of 100. This helps to determine the Sensex.

What is meant by free float?
Free-float is that percentage of total shares issued by the company that are readily available for trading in the market. It excludes shares held by promoters, government etc.
To illustrate: If a company X has 500 shares in total, of which 200 are held by the promoters, Government etc and 300 shares are available for trading to the general public. These 300 shares are the ‘free-floating’ shares and the free float percentage will be 60 % or 0.60.

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Market capitalisation
Market capitalisation represents the valuation of a company. It is determined by multiplying the price of their stocks with the number of shares issued by that company. Market capitalisation = price * quantity

Company X has 500 shares out of which 300 are free floating or available for general public to buy and sell. The price of each share is Rs.80.
Company Y has 1000 shares out of which 700 are free floating. The price of each share is Rs. 100
Market capital of Company X = 40000
Market capital of Company Y = 100000
Free-float factor for Company X = 0.60
Free-float factor for Company Y = 0.70
Total free float market capital of the index = (40000*0.60) + (100000*0.70) = 94000
Let us assume the base year index was 5000.
Value of Index = (94000 x 100)/5000 = 1880
So the Value of the Index is 1880.



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