Economy Updates – Jan-2015

Mathematics Behind Sensex

  • Sensex is a barometer of Indian Capital Markets.
  • It is the oldest stock market index in the country.
  • The term Sensex refers to Sensitivity Index.

How the Sensex is calculated?

  • The Sensex is calculated taking into consideration stock prices of 30 different BSE listed companies. These are large, well-established and financially sound companies from main sectors. The stocks are selected based on a lot of qualitative and quantitative criteria.
  • Sensex is calculated using the “free-float market capitalization” method. Initially, the index was calculated based on the “full market capitalization” method. However, this was shifted to the free-float method with effect from September 1, 2003. Free float market capitalization method is a word wide accepted method and considered as one of the best methods for calculating a stock market index.
  • The base year of the BSE Sensex is 1978-79 and the base value is 100.

What is free Float Market Capitalization?

  • Free float market capitalization means the total number of shares available for the public to trade in the market. It excludes shares held by promoters, governments, trusts, FDIs etc.

Calculation :

Sensex =   Sum of Free Flow Market Cap of 30 benchmark stock * 100
Market Cap Value in 1978-79

Example :

  • Assume Sensex has only two shares SBI and ONGC.
    Name of the share Total Shares Held by Government/Promoters Available for public trading Market Price Free Float Market Cap
    SBI 5000 1500 2500   4001000000
    ONGC 3000 1000 2000 250 500000
  • Assume market cap during the year 1978-79 was Rs. 30000,
  • Then Sensex= 1500000 * 100 / 30000 = 5000
  • In actual calculation instead of taking value of two stocks value of 30 stocks are being included.

Adjustment of Bonus, Rights and Newly Issued Capital

  • 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.
  • when a company forming part of Index, issue bonus shares, right shares or new capital, then adjustment in the Sensex is made accordingly.

Other Factors affecting Index

  • 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.

Based Market capitalization Adjustment

Calculation :

New Base Market capitalization =   Old Base Market Capitalization x New Market Capitalization
Old Market capitalization

Example :

  • if a company issues additional shares which increases the market capitalization of that company by Rs. 100 crore.
    Old Base Market Capitalization Old Market Capitalization Additional shares issued (value) New Market Capitalization New Base Market Capitalization
    2450 4781 100 4881
    2450 * 4881 = 2501.24

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Financial Management