Sensex refers to “Sensitive Index” and is generally associated with the stock market indices. The Sensex is an “index”. An index is basically an indicator. It gives a person,general idea about whether most of the stocks have gone up or most of the stocks have gone down.
The sensex is an indicator of all the major companies of the BSE. If the sensex goes up, it means that the price of the stocks of most of the major companies on the BSE have gone up. If the sensex goes down, this indicate that the stock price of most of the major stocks on the BSE have gone down.
The BSE sensitive index has long been known as the barometer of the daily temperature of Indian stock exchanges. In 1978-79 stock market contained only private sector companies and they were mostly geared to commodity production. Hence, a sample 30 was drawn from them. With the passage of time more and companies private as well as public came into the market.
Calculation of Sensex
Sensex calculation is practiced since 1986.Initially it had been calculated using total market capitalization method but the methodology changed to free float market capitalization since from 2003. Hence these days Sensex is calculated using free float market capitalization of 30 major BSE listed companies and by using base value 100. Sensex is calculated for every 15 seconds.
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 market capitalization.
This determination involves calculation of the following:
1. Market Capitalization: Market capitalization is the total worth of all issued shares of a company. It represents the total worth of a company.
Market Capitalization = Number of Shares Issued x Market price of shares.
2. Free Float Market Capitalization: Free float concept is an index construction methodology which makes use of free float shares in the market. free float market capitalization is the total worth of all shares of a company which are available for trading in the open market. These shares are called free float shares and are available for trading by anyone.