The Bombay Stock Exchange has a benchmark index of 30 shares which acts as a sensitive index for BSE. This is known as Sensex. The most actively traded and dominating shares, as of blue chip companies, are clubbed together to get an idea of the overall trend of the market.
In fact this Sensitive index portrays the mirror image of the entire Bombay Stock Exchange. It was compiled, for the first time, in 1986 and is the oldest index in the country.
The share holders and investors always felt the need for an index which would help them monitor the market trend at the end of the day’s trading session. To facilitate this monitoring of trend, the Bombay Stock exchange compiled the share prices of 30 chosen equities and published the first sensitive index of the exchange in January 1986, which is more commonly known as Sensex.
The method used for compilation then was same as used by the Standard & Poor, USA in the construction of their share price indices. The index for a day was calculated as the percentage of the aggregate market value of the equity shares of all the companies in the sample on that day to the average market value of the equity shares of the same companies during the base period. This method had the advantage that it had the necessary flexibility to adjust the arbitrary price changes cause by the rights and bonus shares. Weighing
As there was the price stability in the financial year 1978-79, so it was chosen as the base year. The method used for computation by Standard & Poor, USA in the construction of their share price indices, the same method was used here. For all the companies the index for the day was calculated as the percentage of the aggregate market value of the equity shares.
The calculation of the index for a particular day was done as the percentage of the aggregate market value of the shares of the companies in the sample on that particular day to the average market value of the shares of the same companies during the base period. The advantage of this method of calculation was that it allowed the flexibility of making adjustments due to price changes caused by the issue of rights and bonus shares.
Many similar index came into existence after the advent of sensex like DOLLEX, S & P CNX 50 and NIFTY, BSE-500, BSE-100 Index, BSE-200. Of Indian stock market, sensex has still the flagship. It is considered equivalent of its international counterparts like NASDAQ, Nikkei, Hang Seng, Dow Jones and FTSE 100.
The free-float method, therefore, does not include restricted stocks, such as those held by promoters, government and strategic investors. The BSEindia.com describes that to find the free-float capitalization we have to multiply the number of outstanding share to the free float factor.
The description of the free-float capitalization is given in the BSEindia.com. The number of outstanding share is to be multiplied to the free float factor. The free floating share to the total outstanding shares was reflected by the free float factor. The number called “Index Divisor” divides the free float capitalization.
The method of calculation of the free float capitalisation is described in the website www.bseindia.com , as the multiplication of the outstanding shares by the free float factor. The percentage of the free floating shares to the total outstanding shares is known as the free float factor. This factor is subsequently divided by a number called the index divisor. The original base period value of the Sensex in the formula is solely linked by this divisor. Over a period of time the comparison of the indices is facilitated by this factor. This makes the indices more relevant in the changing times. As you can see that the Sensex has increased to about 10 times its value since 1990.
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