Sensex Calculations - (Source: http://www.bseindia.com/)
Sensex is calculated using the 'Free-float Market Capitalization' methodology. As per this methodology, 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 over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scripts etc.
Understanding Free-float Methodology:
Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total 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.
In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and Bankex in June 2003. While BSE TECk Index is a TMT benchmark, Bankex is positioned as a benchmark for the banking sector stocks. Sensex becomes the third index in India to be based on the globally accepted Free-float Methodology.
Example:
Suppose the Index consists of only 2 stocks: Stock A and Stock B. Suppose company A has 4,000 shares in total, of which 2,000 are held by promoters, so that the remaining 2,000 shares are 'free-floating'. Similarly, company B has 5,000 shares in total, of which 2,000 are held by the promoters and the rest 3,000 are free-floating.
Now suppose the current market price of stock A is Rs.200. Thus, the 'total' market capitalization of company A is Rs.8,00,000 (4,000 x 200), but its free-float market capitalization is Rs.4,00,000 (2,000 x 200).
Similarly, suppose the current market price of stock B is Rs 500. The total market capitalization of company B will thus be Rs 25,00,000 (5,000 x 500), but its free-float market cap is only Rs 15,00,000 (3,000 x 500).
So as of today the market capitalization of the index (i.e. stocks A and B) is Rs.33,00,000 (Rs.8,00,000 + Rs.25,00,000); while the free-float market capitalization of the index is Rs.19,00,000 (Rs.4,00,000 + Rs.15,00,000).
The year 1978-79 is considered the base year of Sensex with a value set to 100. That is, suppose, at that time, the m-cap of the stocks that comprised the index was 50,000; then we assume that an index m-cap of 50,000 is equal to an index-value of 100. This m-cap value (50,000) can be obtained from the Exchange. Also note: At that time, there may have been some other stocks in the index, not A and B. But that does not matter.
Thus, the value of the index today is = 19,00,000 x 100/50,000 = 3800.
This is how the Sensex is calculated. The factor 100/50,000 is called index divisor.
For further info, you may view: http://www.bseindia.com/about/abindices/bse30.asp
Sensex is calculated using the 'Free-float Market Capitalization' methodology. As per this methodology, 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 over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scripts etc.
Understanding Free-float Methodology:
Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total 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.
In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and Bankex in June 2003. While BSE TECk Index is a TMT benchmark, Bankex is positioned as a benchmark for the banking sector stocks. Sensex becomes the third index in India to be based on the globally accepted Free-float Methodology.
Example:
Suppose the Index consists of only 2 stocks: Stock A and Stock B. Suppose company A has 4,000 shares in total, of which 2,000 are held by promoters, so that the remaining 2,000 shares are 'free-floating'. Similarly, company B has 5,000 shares in total, of which 2,000 are held by the promoters and the rest 3,000 are free-floating.
Now suppose the current market price of stock A is Rs.200. Thus, the 'total' market capitalization of company A is Rs.8,00,000 (4,000 x 200), but its free-float market capitalization is Rs.4,00,000 (2,000 x 200).
Similarly, suppose the current market price of stock B is Rs 500. The total market capitalization of company B will thus be Rs 25,00,000 (5,000 x 500), but its free-float market cap is only Rs 15,00,000 (3,000 x 500).
So as of today the market capitalization of the index (i.e. stocks A and B) is Rs.33,00,000 (Rs.8,00,000 + Rs.25,00,000); while the free-float market capitalization of the index is Rs.19,00,000 (Rs.4,00,000 + Rs.15,00,000).
The year 1978-79 is considered the base year of Sensex with a value set to 100. That is, suppose, at that time, the m-cap of the stocks that comprised the index was 50,000; then we assume that an index m-cap of 50,000 is equal to an index-value of 100. This m-cap value (50,000) can be obtained from the Exchange. Also note: At that time, there may have been some other stocks in the index, not A and B. But that does not matter.
Thus, the value of the index today is = 19,00,000 x 100/50,000 = 3800.
This is how the Sensex is calculated. The factor 100/50,000 is called index divisor.
For further info, you may view: http://www.bseindia.com/about/abindices/bse30.asp
Nifty Calculations
The NSE S&P CNX Nifty is a 50-stock index accounting for 24 sectors of the economy. Nifty essentially comprises the top-50 most liquid stocks that are traded on the NSE. This involves a thorough economic research.
Each scrip has its own beta (volatility) value. Beta indicates how each scrip is correlated with the index movements. Positive correlation implies that the scrip movement is in line with the index movements (ie. when beta is more than 0). Negative correlation implies that the scrip moves in a direction opposite to the index movement (ie. beta value less than 0). Beta = 0 signifies no correlation between the scrip and index movements ie. independent movements. Beta = 1 implies perfect correlation between the two.
Nifty is also calculated as per the 'Free-float Market Capitalisation' methodology. This methodology also takes into consideration corporate actions such as rights issues, stock-splits, etc. affecting the index value.
For Nifty, the base year is 1995 and the base value 1000. The base period considers the closing prices as on November 3, 1995, which marks the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1,000 and the base capital is Rs. 2.06 trillion.
The Sensex and Nifty are calculated every 15 seconds and is disseminated in real time.
Each scrip has its own beta (volatility) value. Beta indicates how each scrip is correlated with the index movements. Positive correlation implies that the scrip movement is in line with the index movements (ie. when beta is more than 0). Negative correlation implies that the scrip moves in a direction opposite to the index movement (ie. beta value less than 0). Beta = 0 signifies no correlation between the scrip and index movements ie. independent movements. Beta = 1 implies perfect correlation between the two.
Nifty is also calculated as per the 'Free-float Market Capitalisation' methodology. This methodology also takes into consideration corporate actions such as rights issues, stock-splits, etc. affecting the index value.
For Nifty, the base year is 1995 and the base value 1000. The base period considers the closing prices as on November 3, 1995, which marks the completion of one year of operations of NSE’s Capital Market Segment. The base value of the index has been set at 1,000 and the base capital is Rs. 2.06 trillion.
The Sensex and Nifty are calculated every 15 seconds and is disseminated in real time.
The NSE Derivative trading commenced in June 2000. To know more about Bank Nifty F&O Index calculations, the following link may help you:
http://www.thehindubusinessline.com/2005/06/11/stories/2005061102131300.htm
http://www.thehindubusinessline.com/2005/06/11/stories/2005061102131300.htm
No comments:
Post a Comment