Understanding NIFTY and SENSEX: Calculation and Methodology
NIFTY and SENSEX are two of the most prominent stock market indices in India. These indices track the performance of a selected group of stocks, providing investors and analysts with crucial insights into the broader market. In this article, we will delve into how these indices are calculated and their methodologies.
Introduction to SENSEX and NIFTY
Float Index Definition: A float index is an index that tracks the representation of the overall share market, focusing on only the actively traded or floating shares. This index is specifically designed to measure the share market in terms of the total shares owned by the public, rather than the entire issued shares.
SENSEX (BSE SENSEX): SENSEX is the base index of the Bombay Stock Exchange (BSE). It is compiled using the free-float market capitalization methodology. SENSEX comprises 30 major listed companies, representing a diverse mix of sectors in the Indian economy.
NIFTY 50: NIFTY, managed by National Stock Exchange (NSE), consists of 50 of the largest and most actively traded companies in the Indian stock market. These 50 stocks represent a broad and diversified range of sectors.
How the SENSEX is Calculated
SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. The index was first compiled in 1986, with a base year of 1978-79 and a base value of 100. The latest methodology of SENSEX calculation involves using the free-float market capitalization approach.
The calculation of SENSEX involves dividing the free-float market capitalization of the 30 constituent stocks by a special number known as the Index Divisor. This divisor is crucial for making the index comparable over time, adjusting for corporate actions, and other changes in the market structure.
Free-float Market Capitalization Methodology: This method focuses solely on the shares that are freely available for trading in the market. For example, if a company has 1,000 shares in total, but 200 are held by promoters and are not available for public trading, the free-float shares are only 800. The market capitalization of these free-float shares is considered in the SENSEX calculation.
Let's illustrate this with an example. Suppose SENSEX consists of two stocks, Stock A and Stock B:
Stock A:- Total Shares: 1,000- Promoter Shares: 200- Free-float Shares: 800- Current Market Price: Rs 120- Free-float Market Capitalization: 800 * 120 Rs 96,000Stock B:- Total Shares: 2,000- Promoter Shares: 1,000- Free-float Shares: 1,000- Current Market Price: Rs 200- Free-float Market Capitalization: 1,000 * 200 Rs 200,000Total Free-float Market Capitalization: Rs 296,000
The base year 1978-79 is set to 100. If the base year market capitalization was Rs 600,000, the current index value would be calculated as follows:
Current Index Value (Current Free-float Market Capitalization / Base Year Market Capitalization) * 100 (296,000 / 600,000) * 100 493.33
This calculation is simplified as shown, and the Index Divisor is the factor that compares the current value to the base year value.
NIFTY 50 Calculation
NIFTY 50, managed by NSE, uses a similar methodology but considers 50 stocks instead of 30. The construction of NIFTY 50 is sector-wise, ensuring a balanced representation of various economic sectors. Each stock in NIFTY 50 is assigned a proper weightage, totalling to 100, to reflect the contribution of each sector to the Indian economy.
While both SENSEX and NIFTY 50 use the free-float market capitalization method, NIFTY 50 is more recent and has a wider scope, including more diverse and representative companies.
Conclusion
Understanding the calculation and methodologies of SENSEX and NIFTY 50 is crucial for investors and analysts. SENSEX provides insights into the performance of 30 major companies, while NIFTY 50 focuses on 50 of the largest and most actively traded companies.
Both indices are widely reported in both domestic and international media, making them valuable tools for gauging the health of the Indian stock market. Whether you are a seasoned investor or a beginner, keeping an eye on these indices can help you make informed decisions in the stock market.