For any investor, it is very important to know some basic terminologies of the stock market before starting their journey. Everything in the stock market has its significance, ways of calculation, and also the risks they are precepted to. So, let's start learning about Sensex. The term Sensex was coined by market analyst Mr. Deepak Mohoni. The word is derived from two words portmanteau of Sensitive and Index.
The meaning of Sensex primarily means an index that reflects the Bombay Stock Exchange, established in 1875. Till January 1, 1986, the stock exchange did not have any official index, and at that time when Sensex made its debut people opted for gauging the performance of the Indian stock market and economy. It comprised 30 prominent stocks that are derived from different and traded actively in the exchange market. The index reflects the Indian Stock market movement. If the Sensex is one increase, it means that there is a general increase in the price of the shares, whereas, if the Sensex decrease, it means there is a general decrease in the price of shares.
In short, if you learn to study Sensex, you will be able to predict the stock market through S&P BSE Sensex. BSE and S&P Dow Jones Indices allied to calculate Sensex. Likewise, Nifty is another way to calculate the ups and downs of NSE, i.e., national stock exchange.
The 30 largest companies are listed in Sensex and most actively traded stocks on BSE, which provide you a scale of Indian economy. It is the oldest and the most trusted index in India. Sensex is used to observe the overall growth, development, and ups and downs of the market by which you can assess the economy and make a better choice in investment.
Calculation Methodology for Sensex
Historically Sensex used the crucial market methodology, but since 2003, it shifted to Free Float Market Capitalization Method. Within which all the major indices were used, like anywhere in the world. You just need to learn to calculate on the index and be ready to trade better. The performance of the 30 selected key stocks thus directly reflects the level of the index.
Free-float market capitalization= Market Capitalization X Free Float Factor
Now that you have learned about Sensex let's learn how to calculate it.
Free Float is referred to the % of the total shares that will be issued by the company that is available on the market to be traded, excluding the shares that are held by the promotors, government, etc.
Whereas market capitalization means the valuation of the company. You can evaluate market capitalization by multiplying the price of a stock with the number of shares issued by a company.
How is Sensex calculated?
Sensex= (Total Free Float Market Capitalization/ Base Market Capitalization) * Base Index