index calculations

7/30/2019 Index Calculations

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SENSEX & NIFTY INDEX CALCULATION

Stock Market performance is quantified by calculating an index using the benchmark scrips and we

all know that SENSEX is associated with Bombay Stock Exchange and NIFTY is associated with

National Stock Exchange, but what many do not know is how those indices are calculated alongwith EPS and PE values.

SENSEX

SENSEX has been calculated since 1986 and initially it was calculated based on the Total MarketCapitalization methodology and the methodology was changed in 2003 to Free Float Market

Capitalization. Hence, these days, the SENSEX is based on the Free Floating Market cap of 30SENSEX Stocks traded on the BSE relative to the base value which is 100(1978-79) and it is

calculated for every 15 seconds.

Free Float Market Capitalization is defined as the value of all the shares available for public trading

excluding the promoter equity, holdings through FDI Route, Holdings by private corporate, andholdings by Employee Welfare Funds. .

Why Free Flow Market Cap?

1. It depicts the market more rationally

2. It removes undue influence of government or promoter share holding, there by giving the equal

opportunity for companies to be in the SENSEX3. Almost all the Indices world over are calculated by this methodology

4. It gives Fund managers more authentic information for benchmark comparisons.

How the SENSEX 30 Stocks are selected?

1. Listing History

2. Trading Frequency3. Rank based on the Market Cap (Should be Among top 100)

4. Market Capitalization weight

5. Industry / sector they belong6. Historical Record

How SENSEX is calculated?

The formula for calculating the SENSEX = (Sum of free flow market cap of 30 benchmarkstocks)*Index Factor

Index Factor = 100/Market Cap Value in 1978-79.

Where, 100 is the Index value during 1978-79.

Example:

Assume SENSEX has only 2 stocks namely SBI and RELIANCE. Total shares in SBI are 500 out

of which 200 are held by Government and only 300 are available for public trading. RELIANCEhas 1000 shares out of which 500 are held by promoters and 500 are available for trading. Assume

price of SBI Stock is Rs.100 and Reliance is Rs.200. Then "free-Floating Market Cap" of these 2


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companies =

(300*100+500*200) = 30000+100000 = Rs. 130000

Assume Market Cap during the year 1978-79 was Rs.25000

Then SENSEX = 130000*100/25000 = 520.

The methodology in the example is exactly followed to calculate the SENSEX, only difference

being the inclusion of 30 stocks.

NIFTY

The National Stock Exchange (NSE) is associated with NIFTY and it is also calculated by the same

methodology but with two key differences.

1. Base year is 1995 and base value is 1000.

2. NIFTY is calculated based on 50 stocks.

Everything else remains the same in NIFTY Index calculation as well.

SENSEX EPS

We all know Earnings per Share (EPS) is calculated for all the companies to show how much acompany generates the net profit for every outstanding share. Likewise EPS is calculated for

SENSEX as well so that we can have a better understanding about the market.

Lets see how it is calculated. All you need for this calculation is EPS of all the 30 SENSEX stocks

along with their Free Float Adjustment Factor.

Example: Take HDFC Bank for the example. Present EPS for HDFC Bank is Rs. 44 and Free FloatAdjustment Factor is 0.85. Free Float Adjustment factor of 0.85 just means 85% of the total

outstanding shares are held by Non-Promoters and are available in the market for trade.

Multiply the EPS with Adjustment Factor which is 44*.85 = 37.4. This 37.4 is the contribution of

HDFC Bank towards SENSEX EPS. Likewise we need to calculate for all 30 stocks and add ittogether to get the final value of SENSEX EPS which should be somewhere around 900 these days.

We can calculate NIFTY EPS in the same manner.

SENSEX PE

PE Ratio is calculated for companies which show what the investors are ready to pay for every

rupee of earnings. If we calculate the same thing by taking into account all the 30 SENSEX stocks,

then we will end up with SENSEX PE.

How to calculate?

Consider the same HDFC Bank. Multiply the Market Price of HDFC Bank with number of shares

outstanding which should be equal to Market Capitalization.

Market Capitalization = Share Price * Total Shares


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Then calculate the Net Profit by multiplying the EPS with Total Shares.

Do this for all the 30 SENSEX stocks.

SENSEX PE = Sum of Market Capitalization of 30 SENSEX Stocks divided by Sum of Net Profit

of all the 30 SENSEX Stocks.

At present the SENSEX PE is around 12 and it provides useful information about SENSEX.

Analysts predict the level of SENSEX using this number only. Suppose, SENSEX PE is 12 andSENSEX EPS is 900, then the Index = 10800. For example, if you believe, earnings of the

companies would grow at 10 percent this year, then apply the same growth rate to both SENSEXPE and SENSEX EPS to predict the SENSEX next year which would be 13*1000 = 13000.

Conclusion: SENSEX PE and SENSEX EPS give some useful information about which way themarket might move. But it is not necessary that the information you get should hold true always. As

we know, Stock Market is a place, where no one can be right all the time.

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