How Nifty & Sensex Are Calculated: A Quick Overview

The indices that dominate the market in India are the Nifty 50 and the Sensex, showing off the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Simply by knowing the way they calculate the indices, you become knowledgeable about the movement in these financial markets and the economy in general.

Method of Calculating

Both the two indices, the Nifty 50 and the Sensex, which are calculated with the free-float market capitalization-based method, take account of only that part of share capital that is available for trading while neglecting the money owned by the promoters, the government, or other entities that also own bigger portions than the other.

Step By Step Process of Calculations:

1. Calculate Market Capitalization:

Market Capitalization = Share Price × Cumulative Outstanding Shares

2. Calculate Free-Float Market Capitalization:

Free-Float Market Capitalization = Market Capitalization × Free-Float Factor

'Free-float factor' connotes the percentage of shares that are available for trading by the public.

3. Compute Index Value:

Index Value = (Current Free-Float Market Capitalization / Base Market Capitalization) × Base Index Value

Base market capitalization and base index value are of course always predetermined at the inception of the index itself.

Nifty 50 Calculation Example:

Consider 50 companies have an aggregate market cap that is not freely floating amounting to ₹50 trillion, and one aphthong is worth ₹5 trillion. The index value brought up is pegged at 1,000.

Index Value:

Index Value = (₹50 trillion / ₹5 trillion) × 1,000 = 10,000

Hence, the calculation has implied that the Nifty 50 index is now at 10,000 points.

Sensex Calculation Example:

Suppose the combined total market capitalization of the free-float shares of the thirty companies is ₹30 trillion. The base market capitalisation was ₹1 trillion with a base index value of 100.

Index Value:

Index Value = (₹30 trillion / ₹1 trillion) × 100 = 3,000

Such is what this presents: the Sensex sinking at 3,000 points.

Implication of Free-Float Methodology:

This methodology posits the use of shares that are available for trading to offer a more accurate reflection of market dynamics. Furthermore, the effect of this is that the index is influenced less by big, nontradable holdings, making it better at telling us about market mood.

Conclusion

There is a great need to watch the Nifty 50 as well as the Sensex as parameters to show how vibrant the Indian bourse is where every single trade in trade index stocks determines where the weight of the stock lies.