How To Calculate SENSEX
Introduction
SENSEX, In mind of People this Question Rise That How Value of Index (SENEX) Increase or Decrease.
first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based;all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use thefree-float methodology.
The growth of the equity market in
Index Specification:
| Base Year | 1978-79 |
| Base Index Value | 100 |
| Date of Launch | 01-01-1986 |
| Method of calculation | Launched on full market capitalization method and effective September 01, 2003, calculation method shifted to free-float market capitalization. |
| Number of scrips | 30 |
Index calculation and Maintenance | |
SENSEX Calculation Methodology
SENSEX is calculated using the "Free-float Market Capitalization"methodology, wherein, 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. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable overtime and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX on a continuous basis.
Dollex-30
BSE also calculates a dollar-linked version of SENSEX and historical values of this index are available since its inception. (For more details click 'Dollex series of BSE indices')
SENSEX - Scrip Selection Criteria
The general guidelines for selection of constituents in SENSEX are as follows:
- Listed History:The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.
- Trading Frequency:The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.
- Final Rank:The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.
- Market Capitalization Weightage :The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index.
- Industry/Sector Representation:Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.
- Track Record:In the opinion of the BSE Index Committee, the company should have an acceptable track record.
Understanding Free-float Methodology
Concept
Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index.Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market.
Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology.
Major advantages of Free-float Methodology
- A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market.
- Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index.
- A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-Ã -vis an invertible index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error.
- Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement.
- Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.
Definition of Free-float
Shareholding 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
- 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.
The remaining shareholders fall under the Free-float category.
Determining Free-float Factors of Companies
BSE has designed a Free-float format, which is filled and submitted by all index companies on a quarterly basis. (Format available on www.bseindia.com). BSE determines the Free-float factor for each company based on the detailed information submitted by the companies in the prescribed format. Free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the Free-float market capitalization. Once the Free-float of a company is determined, it is rounded-off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below. A Free-float factor of say0.55 means that only 55% of the market capitalization of the company will be considered for index calculation.
Free-float Bands:
| % Free-Float | Free-Float Factor | % Free-Float | Free-Float Factor |
| >0 - 5% | 0.05 | >50 - 55% | 0.55 |
| >5 - 10% | 0.10 | >55 - 60% | 0.60 |
| >10 - 15% | 0.15 | >60 - 65% | 0.65 |
| >15 - 20% | 0.20 | >65 - 70% | 0.70 |
| >20 - 25% | 0.25 | >70 - 75% | 0.75 |
| >25 - 30% | 0.30 | >75 - 80% | 0.80 |
| >30 - 35% | 0.35 | >80 - 85% | 0.85 |
| >35 - 40% | 0.40 | >85 - 90% | 0.90 |
| >40 - 45% | 0.45 | >90 - 95% | 0.95 |
| >45 - 50% | 0.50 | >95 - 100% | 1.00 |
Index Closure Algorithm
The closing SENSEX on any trading day is computed taking the weighted average of all the trades on SENSEX constituents in the last 30 minutes of trading session. If a SENSEX constituent has not traded in the last 30 minutes, the last traded price is taken for computation of the Index closure. If a SENSEX constituent has not traded at all in a day, then its last day's closing price is taken for computation of Index closure. The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value.
Maintenance of SENSEX
One of the important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that replacement of stocks in Index, additional issue of capital and other corporate announcements like 'rights issue' etc. do not destroy the historical value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per SE affect the index values.
The BSE Index Cell does the day-to-day maintenance of the index within the broad index policy framework set by the BSE Index Committee. The BSE Index Cell ensures that SENSEX and all the other BSE indies maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. The BSE Index Committee comprises of capital market expert, fund managers, market participants and members of the BSE Governing Board.
On-Line Computation of the Index
During trading hours, value of the Index is calculated and disseminated on real time basis. This is done automatically on the basis of prices at which trades in Index constituents are executed.
Adjustment for Bonus, Rights and Newly Issued Capital
SENSEX calculation needs to be adjusted for issue of Bonus or Rights shares If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. At the BSE Index Cell , the base value is adjusted,which is used to alter market capitalization of the component stocks to arrive at the SENSEX value.
The BSE Index Cell keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 19 Indies.
- Adjustments for Rights Issues
When a company, included in the compilation of the index, issues right shares, the free-float market capitalization of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market capitalization (see 'Base Market capitalization Adjustment' below). - Adjustments for Bonus Issue
When a company, included in the compilation of the index, issues bonus shares, the market capitalization of that company does not undergo any change. Therefore, there is no change in the Base Market capitalization, only the 'number of shares' in the formula is updated. - Other Issues
Base Market capitalization adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc. - Base Market capitalization Adjustment
The formula for adjusting the Base Market capitalization is as follows:
New Market capitalization
New Base Market capitalization = Old Base Market capitalization x---------------------------------------
Old Market capitalization
To illustrate, suppose a company issues right shares which increases the market capitalization of the shares of that company by say, Rs.100 corers. The existing Base Market capitalization (Old Base Market capitalization), say, is Rs.2450 cores and the aggregate market capitalization of all the shares included in the index before the right issue is made is, say Rs.4781 corer. The"New Base Market capitalization " will then be:
2450x (4781+100)
-------------------------- = Rs.25012.4 Million
4781
This figure of Rs. 25012.4 Million will be used as the Base Market capitalization for calculating the index number from then onwards till the next base change becomes necessary.
Index Review Frequency
The BSE Index Committee meets every quarter to discuss index related issues. In case of a revision in the Index constituents, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of the Index.
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