What is SENSEX?
The Sensex, also known as the S&P BSE Sensex, is a benchmark index based on the Bombay Stock Exchange (BSE). Sensex comprises of the top 30 stocks according to market capitalization operating on the BSE. These stocks represent large, well-established and financially sound companies across key sectors of the economy. As these companies are the industry leaders and are selected from across sectors, the Sensex provides quite an accurate gauge of the Indian economy. The
How does it evaluate a company?
The Sensex uses a free-float capitalization for valuation of companies. A free-float capitalization means that a company’s value is determined by multiplying the number of shares freely available on the market with the value per share. The free-float method only takes shares that are freely available on the market and does not consider preferred shares or any other shares given to employees, directors or other special interest parties.
Calculating Free-Float Capital
The Free-Float Capitalization method only takes shares that are floated by a company into consideration. To determine the Free-Float Capitalization of a company the market capitalization of the company needs to be determined first. Market capitalization is determined by multiplying the total outstanding shares of a company with the share price. To calculate the free-float market capitalization of a company you will multiply this with the free-float factor. A free-float factor is the ratio of floated shares to the total outstanding shares. If a company has 1,00,000 total outstanding shares priced at Rs. 10 and floats 83,000 shares, the company would have floated 83% of its total outstanding shares. The free float factor of this company would be 0.83. The free-float market capitalization of this company would be calculated as demonstrated below:
Number of shares outstanding * Price per share * free-float factor
1,00,000 * 10 * 0.83 = Rs. 8,30,000
The free-float market capitalization of the above company is Rs. 8,30,000.
Why do we need Sensex?
The Sensex provides a gauge to check the performance of the industry leaders across the industry. The free-float market capitalization of these companies is a reasonably accurate gauge to check the company’s health and actual industry influence. The Sensex basically monitors the performance of these 30 companies to provide a picture of the performance of each industry within our economy. As the Sensex monitors the performance of the industry leaders from each industry, it can provide a clear picture of how the overall economy is performing.