Free- float market capitalization method is the method that is used to arrive at the sensex figure.
Mathematically free-float capitalization for a stock is represented as,
Free-float factor x market capitalization
Consider a company called xyz, it's free float factor value is 0.6 and it has the market capitalization of Rs.50000, then free-float capitalization is calculated as 0.6 x 50,000 = Rs.30,000.
Steps to calculate sensex
- Free- float market capitalization of each company is calculated
- Add all the above results to obtain total free-float market capitalization value
- Apply relative weight method
to understand the third step more clearer Consider the total free-float market capitalization at a point of time is Rs.5000000, Say at that instant sensex is 3000... After a year or so, total free-float market capitalization has raised to Rs.6000000 then the new sensex will be???
Total market capitalization ----------------------sensex
Rs.5000000 -------------------------------------3000------ (say at time 'Z')
Rs.6000000 ---------------------------------------?---------(say some times after 'Z')
Here we have to apply ratio and proportion concept ,
i.e. 5000000 / 6000000 = 3000 / ?
? = 3000 x ( 6/5 ) = 3600
Now 3600 is the new sensex point...
same calculation holds good for nifty index too... For sensex we calculate total free-float market capitalization of 30 stocks and for nifty index we calculate for 50 stocks ...
[One more question that will arise soon is that what is the starting point considered to make this relative calculation!!! Answer for this is the base year... for sensex 1978-1979 is assumed to be the base year, at that point sensex base is assumed be 100 and for Nifty index ,3rd NOV 1995 is assumed to be the base year with base value of 1000 ...]
Note : All these sensex & Nifty index calculations are carried out in real time and are refreshed out at an regular interval of every 15 sec.... anyway if confused just keep this in mind if the sensex or nifty index goes up, the market is doing well or else it's not ;-)
Market capitalization adjustment :
suppose if a company gives bonus for its share holders then new sensex will be based on some adjustment in the total market capitalization....
Total market capitalization (new) = Total market capitalization(old) x [ New market capitalization of stock / old market capitalization of stock]
rest calculation remains same...
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