Sensex - The Stock Index

Stock market performance is quantified by calculation an index using benchmark scrip’s and we all know that ‘Sensex’ is associated with Bombay stock exchange and ‘nifty’ is associated with National stock Exchange. Some other index of other country Hong Kong's Hang Seng Index ,Japan's Nikkei, USA’s Dow Jones, London stock exchange’s FTSE, Frankfurt Stock Exchange(German)’s DAX, French stock exchange’s CAC

Sensex Sensex has been calculated since 1986 and initially it was calculated based on the total market capitalization methodology and methodology was changed in 2003 to free float market capitalization. Hence now Sensex is based on the free floating market cap of 30 Sensex stock traded on the BSE relative to the base value which is 100(78-79) and it is calculated for every 15 sec. Free float market capitalization Is defined as the value of all the shares available for public trading excluding the promoter equity ,holdings through FDI route, holding by private corporate and holdings by Employee welfare funds why free flow market cap ? - It depicts the market more rationally - It removes undue influence of government or promoter share holding there by giving the equal opportunity for companies to be the Sensex -Almost all the indices world over are calculated by this methodology - It gives fund manager more authentic information for benchmark comparisons How the Sensex 30 stocks are selected ? - listing history - Trading frequency - Rank based on the market cap - Market capitalization weight - Industry / sector they belong - Historical record How Sensex is calculated The formula for calculating the Sensex = ( sum of free flow market cap of 30 benchmark stocks) * index factor index factor = 100/market cap value in 1978-79 100 is the index value during 1978-79 Example Assume Sensex has only 2 stocks namely SBI and RELIANCE total shares in SBI are 500 out of which 200 are held by government and only 300 are available for public trading .RELIANCE has 1000 shares out of which 500 are held by promoters and 500 are available for trading .assume price of SBI stock is Rs 100 and reliance is Rs 200 .then free floating market cap of these 2 companies = (300*100+500*200)=30000+100000=Rs 130000 Assume market cap during the year 78-79 was Rs 25000 Then Sensex 130000*100/25000=520 This methodology is the example is exactly followed to calculate the Sensex only difference being the inclusion of 30 stocks

Nifty The National stock exchange is associated with Nifty and it is also calculated by the same methodology but with two key differences 1) Base year is 1995 and base value is 1000 2) Nifty is calculated based on 50 stocks Everything else remains the same in NIFTY index calculated as well Sensex Eps We all know earnings per share (Eps) are calculated for all the companies to show how much a company generated the net profit for every outstanding share. Likewise Eps is calculated for Sensex as well so that we can have a better understanding about the market Let see how it is calculated .all you need for this calculation is EPS of the all the 30 Sensex stocks along with their free float adjustment factor Example Take HDFC bank for the examples . Present EPS for HDFC bank is Rs 44 and free float adjustment factor is 0.85 .Free float adjustment factor is 0.85 just means 85% of the total outstanding shares are held by non-promoters and are available in the market for trade Note :- The Free float Adjustment factor represents the proportion of shares that is free floated as a percentage of issued shares and then its rounded up to the nearest multiple of 5% for calculation purposes. To find the free-float capitalization of a company, first find its market cap (number of outstanding shares x share price) then multiply its free-float factor. The free-float method, therefore, does not include restricted stocks, such as those held by company insiders. Multiply the EPS with adjustment factor which is 44*85=37.4 This 37.4 is the contribution of HDFC bank towards Sensex EPS. Likewise we need to calculate for all 30 stock and add it together to get the final value of Sensex EPS which should be somewhere around 900 these days We can calculate NIFTY EPS in the same manner Sensex PE PE Ratio is calculated for companies which show what the investors are ready to pay for every rupee of earnings. if we calculated the same things by taking into account all the 30 Sensex stocks then we will end up with Sensex PE Note:-If PE of a company is 30 it means that investor/s is/are ready to pay Rs 30 for every one rupee that the company earns in profits. In short, PE of a company = Market price / Earnings per share. If the market price of a company on a given day is Rs 500 and its EPS is Rs 100 the PE ratio of that stock would be 5. How to calculate ? Consider the same HDFC bank, multiply the market price of HDFC bank with number of shares outstanding which should be equal to market capitalization Market capitalization = share price * total share Then calculate the net profit by multiplying the EPS with total shares Do this for all the 30 Sensex stock SENSEX PE = sum of market capitalization of Sensex stocks Divided by sum of net profit of all the 30 Sensex stocks At present the Sensex PE is around 12 and it provides useful Information about Sensex . Analysts predict the level of Sensex using this number only. Suppose Sensex PE and SENSEX EPS to predict the Sensex next year which would be 13 *1000=13000 Sensex PE and Sensex EPS give some useful information about which way the market might move but it is not necessary that the information you get should hold true always as we know stock market is a place where no one can be right all the time Sectoral break up of Sensex