02 June 2017

How Sensex and Nifty are Calculated? Free-Float Methodology

Sensex and Nifty two major stock indices of Indian share markets are trading in its all time time as of June 2017.  BSE SENSEX - 31,273.27 - 2 Jun, 11:26 AM IST and NIFTY 50 - 9,648.50 - 11:27 AM IST.

Understanding Sensex and Nifty

Both Sensex and Nifty are Calculated using Free-float methodology.

Free float methodology – Explained

Free-float methodology is a method to calculate market capitalization index for particular market. It is calculated by taking the equity's price and multiplying it by the number of shares readily available in the market i.e excluding the following categories

1. Shares held by founders/directors/acquirers which has control element
2. Shares held by persons/ bodies with “Controlling Interest”
3. Shares held by Government as promoter/acquirer
4. Holdings through the FDI Route
5. Strategic stakes by private corporate bodies/ individuals
6. Equity held by associate/group companies (cross-holdings)
7. Equity held by Employee Welfare Trusts
8. Locked-in shares and shares which would not be sold in the open market in normal course.

The free-float methodology has been adopted by most of the world's major indexes.

Step by Step process

Step - 1 Determining the market capitalization for each company

Market Capitalization = Shares outstanding * Price

Step - 2 Weights of company is determined by NSE (for nifty). Weights is a multiple by which company’s Market capitalization is multiplied to arrive at Free-float market capitalization. The weights for each company in the index are determined based on the public shareholding of the companies as disclosed in the shareholding pattern submitted to the stock exchanges on quarterly basis. Weights are between 0.05 to 1.

Step – 3 Calculation of Free Float Market Capitalization

FFMC= Shares outstanding * Price * IWF

IWF - Investible weight factors (weights used in Nifty)

Step –4 Calculating the Index Value

Index value = Current Market Value / Base Market Capital * Base Index Value

Base Date and Value

Base market capital of the Index is the aggregate market capitalisation of each scrip in the Index during the base period. The market cap during the base period is equated to an Index value of 1000 known as the base Index value.  The base period selected for NIFTY 50 index is the close of prices 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 1000 and a base capital of Rs.2.06 trillion.

The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. The index is reviewed every six months (on half-yearly basis) and a four weeks’ notice is given to the market before making changes to the index set. The Index Maintenance Sub-committee takes all decisions on addition/ deletion of companies in any Index.

I'm a Polymath my learning activities spans over different subject areas and I blog somthing about everthing.