INDEX FACTOR

Many people see the sensex levels and make there investments, but we need to be aware of the fact that how the sensex level is calculated.

I am here by sharing my findings on the small topic; hope this information will be beneficial for the readers and investors.

Sensex is basically calculated on the Free-Float Market Capitalization methodology
As per this the level of index at any point of time reflects the Free-Float market value of
Selected front line stocks, the market capitalization of a company are determined by multiplying the price of its stock by the number of shares issued by the company. This
Market capitalization if further multiplied by the free-float factor to determine the free
Float market capitalization.

Example: - A&B is two different stocks.

Suppose Company A has 1000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so – called “free-floating” shares.

Similarly, Company B has 2000 shares in total, of which 1000 are held by the promoters and the rest 1000 are free-floating.

Suppose the current market price of stock A is Rs 120. Thus, the total market capitalization of company A is Rs 120,000(1000 x 120) but its free-float market capitalization is Rs 96000(800x120).

Similarly, suppose the current market price of stocks B is Rs200. The total market capitalization of company B will thus be Rs 400000 (2000x200), but its free-float market cap is only Rs200000 (1000x200).

So as of today the market capitalization of the index (i.e. stocks A & B) is Rs 520000 (120000 + 400000), while the free-float market capitalization of the index is Rs 296000 (Rs96000 + Rs200000).

The Year 1979 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalization of the stocks that comprised the index then was, say 60000( with some +/- of old new stocks, does not matter much) then we assume that an index market cap of 60000 is equal to an index-value of100.
Thus the value of the index today is = 296000 x 100/60000 = 493.33

Thus the value of sensex is calculated

The factor 100/60000 or 0.001667 is called the index divisor or factor.