An Introduction to Indian Stock Market

Very frequently we use to hear the news like, “SENSEX or NIFTY has touched the scale of 18,000…” or “SENSEX or NIFTY is going up” or something like this…

As a layman, the first question arises in our heads that,

What does it mean by SENSEX and NIFTY?

In India there are two main stock exchanges

1. Bombay Stock Exchange (BSE) situated in Mumbai. Its index is called SENSEX.
2. National Stock Exchange (NSE) situated in Delhi. Its index is called NIFTY.

So, now we are aware with SENSEX and NIFTY.

In simple words SENSEX or NIFTY is nothing but a unit less quantity which determines the direction of the stock market. If SENSEX/NIFTY is increasing we may say that stock market is growing, similarly if SENSEX/NIFTY is not growing.

Note: These are simple understanding but there are lot more things to determine the direction of stock market

Now the second question comes to our mind is,

How SENSEX or NIFTY index is calculated?

In order to answer this question we will first understand the BSE index calculation i.e. SENSEX. NIFTY index calculation is nothing but the similar process with the companies listed in National Stock Exchange (NSE), New Delhi.

There are list of companies which are registered into Bombay Stock Exchange (BSE). Every morning a set of 30 companies are chosen from the companies registered with BSE. These company’s share values are used to determine the BSE index i.e. SENSEX.

30 companies selected for SENSEX calculation should satisfy following criteria

1. Company should have a market capitalization among top 100 market capitalizations of the companies registered with BSE.
2. Stocks of the company should have been traded (trade means buy and sell) on each and every trading day for last one year i.e. 52 weeks.
3. Company should have been registered with BSE at least a year before.
4. Company should have a good track record.
5. Company should be leaders in their group.

SENSEX Calculation:

For each of the 30 companies selected above Free Float Market Capitalization is calculated and summed up.

1. a. Calculate Free Float Market Capitalization of the 30 companies

Free Float Market Capitalization of any company is nothing but the amount required to purchase the freely floating shares of that company. Freely Floating hares are those shares which does not belongs to company’s chair person or board of directors.

Now we understand how the free float market capitalization of any company is calculated i.e.

(#No of freely floating share) X (Price of each share)

We will now sum up the free float market capitalization of all the 30 companies

FFMC for the day = Sum of FFMC of the 30 companies selected

Here, FFMC stands for Free Float Market Capitalization

1. b. Determine SENSEX with the help of FFMC

On 1978-79 base value for BSE index was assumed as 100. Suppose on that date FFMC was  Rs 1000 corore. In order to calculate SENSEX for the next day we are supposed to calculate FFMC for that day suppose that is Rs 1100 corore

I hope now we are clear, how SENSEX (?) is calculated.

Note: Like this we started calculating SENSEX whose base value was 100 (decided in 1978-79 as base value). SENSEX value changes every movement. The latest value depends on the previous one. i.e. Latest value is put in place of Question Mark (?) and the old value is put in the place of base value 100 and FFMCs are also replaced accordingly in order to calculate the SENSEX.