nse bse indices are calculated using Free -Float market capitalization method. NSE’s (National Stock Exchange) index is called NIFTY. Nifty is composition of 50 stocks traded on NSE based on free float market capitalization. Similarly BSE’s (Bombay Stock Exchange) index is called SENSEX which consists of top 30 stocks traded on BSE. The purpose of any index including nse bse indices is to provide the average price movement by capturing overall market behavior This is possible only if indices are calculated with scientific and valid methods. In calculation of indices important factors are method chosen, number of stocks to be included in index, diversification across stocks, diversification across sectors. NSE BSE indices also follow these guidelines. After proper index construction it is also important to manage and revise to reflect changes like inclusion of new stocks, rights issue, bonus issue, amalgamation, de listing etc.,
How nse bse indices are calculated?
As mentioned earlier, both nse’s Nifty and bse’s Sensex use free float market capitalization method in calculating their indices. These are constructed and maintained by professional bodies which are free from market participant’s influence.
Free float market capitalization method is same like market capitalization method (see detailed calculation with example below). The only difference is in free float only readily available shares for trading (excluding promoter shares, locked-in shares etc.,), whereas market capitalization method considers total numbers of shares listed on the exchange. Both nse and bse moved to free float method as this give more accurate representation of market movement. It can be stated that index calculated only using the free float of market capitalization is free float market capitalization index.
Calculation of market capitalization weighed index
Higher the market capitalization of a stock more will be its weight age in the index value. Market capitalization = Total outstanding shares * Current Market Price of the Stock. For Example Reliance Industries Free Float Market Cap is 1,41,160 Crores at it price of around 850 (Total free float is 1,65,41,65,764 shares as per Dec 2012 share holding pattern).
|Base Price||No of Shares||Base Market Cap||Base Weights||Base Portfolio value||New Price||No of Shares||New Market Cap||New Weights||New Portfolio Value|
|A||B||C = A*B||D||E = A*D||F||G||H = F*G||I||J = F*I|
For ease of calculation and understanding it is assumed that prices are doubled from base calculation time to present calculation time. It is further assumed that No of shares are same (No corporate actions like rights issue, splits, bonus shares etc.,).
During base period calculation total value of 237 is equated to base value of 100. So the new index value will be (474/237) * 100 = 200.
To calculate free float capitalization we just need to include no of shares which are not held by promoters or associated companies of promoters. It gives more accurate movement of index because promoters do not participate in trading and their holding is mostly irrelevant in index movement.