Tuesday, February 17, 2009

SENSEX & NIFTY INDEX CALCULATION

Stock Market performance is quantified by calculating an index using the benchmark scrip’s and we all know that SENSEX is associated with Bombay Stock Exchange and NIFTY is associated with National Stock Exchange, but what many do not know is how those indices are calculated along with EPS and PE values.

SENSEX

SENSEX has been calculated since 1986 and initially it was calculated based on the Total Market Capitalization methodology and the methodology was changed in 2003 to Free Float Market Capitalization. Hence, these days, the SENSEX is based on the Free Floating Market cap of 30 SENSEX Stocks traded on the BSE relative to the base value which is 100(1978-79) and it is calculated for every 15 seconds.


Free Float Market Capitalization is defined as the value of all the shares available for public trading excluding the promoter equity, holdings through FDI Route, Holdings by private corporate, and holdings by Employee Welfare Funds. .

Why Free Flow Market Cap?

1. It depicts the market more rationally
2. It removes undue influence of government or promoter share holding, there by giving the equal opportunity for companies to be in the SENSEX
3. Almost all the Indices world over are calculated by this methodology
4. It gives Fund managers more authentic information for benchmark comparisons.

How the SENSEX 30 Stocks are selected?

1. Listing History
2. Trading Frequency
3. Rank based on the Market Cap (Should be Among top 100)
4. Market Capitalization weight
5. Industry / sector they belong
6. Historical Record


How SENSEX is calculated?

The formula for calculating the SENSEX = (Sum of free flow market cap of 30 benchmark stocks)*Index Factor

Index Factor = 100/Market Cap Value in 1978-79.

Where, 100 is the Index value during 1978-79.

Example:

Assume SENSEX has only 2 stocks namely SBI and RELIANCE. Total shares in SBI are 500 out of which 200 are held by Government and only 300 are available for public trading. RELIANCE has 1000 shares out of which 500 are held by promoters and 500 are available for trading. Assume price of SBI Stock is Rs.100 and Reliance is Rs.200. Then "free-Floating Market Cap" of these 2 companies =

(300*100+500*200) = 30000+100000 = Rs. 130000

Assume Market Cap during the year 1978-79 was Rs.25000

Then SENSEX = 130000*100/25000 = 520.

The methodology in the example is exactly followed to calculate the SENSEX, only difference being the inclusion of 30 stocks.

NIFTY

The National Stock Exchange (NSE) is associated with NIFTY and it is also calculated by the same methodology but with two key differences.


1. Base year is 1995 and base value is 1000.
2. NIFTY is calculated based on 50 stocks.

Everything else remains the same in NIFTY Index calculation as well.


SENSEX EPS

We all know Earnings per Share (EPS) is calculated for all the companies to show how much a company generates the net profit for every outstanding share. Likewise EPS is calculated for SENSEX as well so that we can have a better understanding about the market.

Let’s see how it is calculated. All you need for this calculation is EPS of all the 30 SENSEX stocks along with their Free Float Adjustment Factor.

Example: Take HDFC Bank for the example. Present EPS for HDFC Bank is Rs. 44 and Free Float Adjustment Factor is 0.85. Free Float Adjustment factor of 0.85 just means 85% of the total outstanding shares are held by Non-Promoters and are available in the market for trade.

Multiply the EPS with Adjustment Factor which is 44*.85 = 37.4. This 37.4 is the contribution of HDFC Bank towards SENSEX EPS. Likewise we need to calculate for all 30 stocks and add it together to get the final value of SENSEX EPS which should be somewhere around 900 these days. We can calculate NIFTY EPS in the same manner.

SENSEX PE

PE Ratio is calculated for companies which show what the investors are ready to pay for every rupee of earnings. If we calculate the same thing by taking into account all the 30 SENSEX stocks, then we will end up with SENSEX PE.

How to calculate?

Consider the same HDFC Bank. Multiply the Market Price of HDFC Bank with number of shares outstanding which should be equal to Market Capitalization.

Market Capitalization = Share Price * Total Shares

Then calculate the Net Profit by multiplying the EPS with Total Shares.

Do this for all the 30 SENSEX stocks.

SENSEX PE = Sum of Market Capitalization of 30 SENSEX Stocks divided by Sum of Net Profit of all the 30 SENSEX Stocks.

At present the SENSEX PE is around 12 and it provides useful information about SENSEX. Analysts predict the level of SENSEX using this number only. Suppose, SENSEX PE is 12 and SENSEX EPS is 900, then the Index = 10800. For example, if you believe, earnings of the companies would grow at 10 percent this year, then apply the same growth rate to both SENSEX PE and SENSEX EPS to predict the SENSEX next year which would be 13*1000 = 13000.

Conclusion: SENSEX PE and SENSEX EPS give some useful information about which way the market might move. But it is not necessary that the information you get should hold true always. As we know, Stock Market is a place, where no one can be right all the time.

Kumaran Seenivasan

54 comments:

Shabu's February 17, 2009 at 10:17 PM  

Dear Mr Kumaran,

Its excellent... and simple projection of the formula with examples about the most talked indices. Such posts will help out the common investors in great way.... keep it up and regards

Shabu

Dr.Krishna February 18, 2009 at 2:38 AM  

Kumaran, excellent article. I added a link to this article. Keep it up. Good begining.

DBA-Oracle-Admin/StockNvestor February 18, 2009 at 4:17 AM  

Dear Sir,

Great work...thanks for spreading knowledge,the post is in simple language and it can be understand easily....sir you are doing a great work...keep the good work going....god bless you with more knowledge...there is one saying the people who got enough knowledge is said to be an knowledge GOD...sir you are god of knowledge.

Kumaran February 18, 2009 at 6:00 AM  

Thank You all for your appreciative comments and I will try my best to give you the best possible content you can have on the topics I choose to write.

Eeswaran February 18, 2009 at 8:39 AM  

It's is really excellent...Post some of the share market basics - to help the beginners...

BULLS February 19, 2009 at 12:51 AM  

Hello Mr Kumaran,

The most striking aspect of your posting is 'Simplicity'. Simplicity blended with logical conclusions & explanations.

And, most of all, your ability to touch diverse topics of discussion in every other new article.

-BULLS

madankumarrajan February 22, 2009 at 10:03 AM  

Kumaran,

I am a newbie to stock market. This post was really useful.

Thanks :-)

Anonymous,  July 8, 2009 at 9:29 AM  

Really indeed good article Mr.Kumaran.

It would be great if you could share some article about ONLINE TRADING i.e., Intra trading and how to benefit from such trading.

Kannan September 19, 2009 at 10:09 PM  

Hi Kumaran,
Very good article. Would you suggest good resources where I can get more information.

Thanks,
Kannan

Kannan September 19, 2009 at 10:09 PM  

Hi Kumaran,
Very good article. Would you suggest good resources where I can get more information.

Thanks,
Kannan

Anonymous,  November 13, 2009 at 3:50 AM  

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Sorry for offtopic

sharetipsinfo December 11, 2009 at 9:24 AM  

Hi,


The market is currently enjoying a good rally which has seen most stocks gain from competitive advantage and it would be advisable for all stock market enthusiasts to seize this opportunity and plan their investments in a safer yet conducive stock market. With NIFTY hovering around 4800-4900 +, it is expected to take hold of this currently rally and be realistically be closest to 5000 more so than before in what should be its new 52 week high.

Lot many untouched stocks are still there which are ready to blast any moment.



Regards
SHARETIPSINFO TEAM

Pushkar,  December 28, 2009 at 5:07 AM  

Hello,

I have done the following analysis(all are paper trades):-
Case 1. SIP in nifty since 1/1/19999 and sold all yesterday…calculated the returns
Case 2. Entered the market at PE of 11 or below. Kept on buying every month until the PE was under 15. Stopped buying ones the PE is above 15. Exit all at PE 27. Re-entry only at PE at 11 and then buy every month until PE is below 15…and so on.
Case3. Case 2 + I shorted the mkt at PE 27 and covered all at PE 11, rest all is same as case 2.

Returns:-
Case1. 18% CAGR i.e. 18% per year cumulated annual compounding for 11 years.
Rs 100 per month became Rs 37000 after 11 years. net profit is Rs 25000(Rs 13200 is investment amount)

Case2. 30% CAGR. Rs 100 per month became 78000 after 11 years.

Case3. 38% CAGR Rs 100 per month became 122000 after 11 years.

Please note that in cases 2 and 3 when I am not able to enter each month, I keep those Rs 100 in Fixed deposits, one my entry level comes(either for short or for long, I liquidate my FDs and enter the markets) so investment amount in all the 3 cases is exactly the same.

In these 11 years there were not more than 4-5 buys and 2 sells in case 2 and 3.

Case 3 outperformed case 2 and case 2 outperformed case 1.

My questions:-
I plan to implement this strategy for my investments. I want to know how safe it is to go short at 27. Isnt it possible that nifty PE might just move into some different range, maybe the next time when the fall comes after say 5 years, maybe nifty PE could be 32 or 33…is that possible? Case 3 gets into a very big risk if this happens.

Regards,
Pushkar

Anonymous,  March 24, 2010 at 2:42 AM  

REALLY YOU GUYS HAVE DONE VERY GOOD WORK....

arindam April 8, 2010 at 12:52 AM  

Dear Mr Kumaran
Hats off to you for this explanation.

Regards
Arindam Chatterjee
BIM

PRAVIN LATHKAR,  April 15, 2010 at 8:55 AM  

IT IS GOOD COMBINATION OF THEORY AND PRACTICAL IN SIMPLE MANNER, ANY ONE CAN UNDERSTAND WITHOUT ANY DIFFICULTY

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suresh May 24, 2010 at 9:28 AM  

dear sir
you have explained the basics of Nifty and SEENSEX in very simple and easy manner. as a fresher to market, i am really indebited to your explanation
great work and keep it up sir

from suresh

Anonymous,  May 28, 2010 at 10:26 AM  

SIR can you kindly tell me which net profit figures to consider for SENSEX EPS CALCULATION (consolidated/standalone/audited/unaudited/result of group as a whole)
Please help me...

Anonymous,  July 31, 2010 at 10:18 AM  

i am in CA final and i havnt got such a simpler way of calculation of indices.great job!!

KnowYourProfit September 24, 2010 at 5:54 AM  

This blog is quite nice and informative blog created by the webmaster

As per our previous posting we had already told that the Indian Stock Market is now in such a position that either side breakout can be witnessed soon and Today Sensex has Touched 19000 level Sensex


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Raghunath J Pai,  October 11, 2010 at 12:02 PM  

Hi thank u for the article..but i would like to ask u one doubt..
what is the base value for co.s which came into existence after 1978-79..?? to calculate sensex...pls help..!

Anonymous,  January 6, 2011 at 2:28 PM  

Hi kumar,
The information provided by you would be worth taken by all finance related graduates and post graduates, so i would like to cheer and buck up you for further interest things regard to market finance very much in future

Thank you,
Srikanth Gowda, karnataka

Anonymous,  January 14, 2011 at 10:39 AM  

If you are open to having a guest blog poster please reply and let me know. I will provide you with unique content for your blog, thanks.

Anonymous,  February 17, 2011 at 11:49 AM  

Hi,
Thnx for the info its v.useful and the way the it is explained its v.nice....

Think over it once February 24, 2011 at 6:02 AM  

May I know what is Index factor in the calculation of SENSEX
Thank you,
Sneha.

Stock Tips March 26, 2011 at 7:42 AM  

It was a awe-inspiring post and it has a significant meaning and thanks for sharing the information.Would love to read your next post too......
Thanks
Regards
Stock Tips

stock tips May 20, 2011 at 1:40 AM  

Very good post, I was really searching for this topic, as I wanted this topic to understand completely and it is also
very rare in internet, that is why it was very difficult to understand.
Thank you for sharing this.
regards:
Stock Tips

Ritesh. P May 23, 2011 at 2:31 PM  

A very useful post. I like the way you've explained the concepts using numbers. Keep it up, Kumaran. :)

Chan May 26, 2011 at 11:32 AM  

Hi Kumaran,

The most essential knowledge for a trader being explained in simple terms.
Tons of Thanks.

Keep Feeding us

venki June 17, 2011 at 7:47 AM  

Excellant.......nice article....

--Venkip
Hyderabad

Suresha July 11, 2011 at 7:06 PM  

Helllo sir,
Excellent!!! Appreciate your hard work. its really helpful

Regards,
Suresha

RAVI BHANDARI July 16, 2011 at 12:23 AM  

It's very nice sensex calculation. But it would be better if you had sown how the base market capitalisaiton is calculated...instead of assuming base market capitalisation.And I want to know how the price of stock changes? And details about the stock selection method

Anonymous,  September 14, 2011 at 2:22 AM  

Explained very well.Could not find this in NSE and BSE as well with such granularity. I think NSE and BSE websites should be bit eloberate while explaining the calculation

shibashish sahu February 1, 2012 at 12:56 PM  

Its really easy to understand for the learner which can give an overall idea about sensex and nifty...............

Anonymous,  February 19, 2012 at 12:47 AM  

thanks a lot

vishal March 1, 2012 at 5:52 AM  

Thanks so much for this! I haven't been this moved by a blog for a long time! You’ve got it, whatever that means in blogging. Anyway, You are definitely someone that has something to say that people need to hear. Keep up the good work. Keep on inspiring the people!

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kavan March 9, 2012 at 12:17 AM  

Mr. Kumaran,

It really fantastic work and the way to explain entire calculation and formation of benchmark is so good and on its very easy to understand entire thing. so its help alot.

thank you so much

Unknown May 6, 2012 at 9:04 AM  

Dear kumaran sir
It is the best article i ever read about the sensex calculation. Thank you very much for such a beautifull article. Kindly add some more articles related to finance.
Thank you sir

Aswin May 22, 2012 at 4:46 AM  

Dear Sir,
That was an excellent explanation.. how can i get my other doubts clarified from you ??

Paul June 7, 2012 at 5:22 AM  

thanks for this post. This post makes a great point about focusing your efforts.

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Payal Gupta,  August 12, 2012 at 12:19 PM  

Excellent article Sir, it helped me a lot in understanding the significance of SENSEX PE AND SENSEX EPS.

Kiran Malladad August 29, 2012 at 1:31 PM  

Hello Sir

It was really worth of reading the information. thanks for sharing with everyone

Regards
Kiran Malladad

Kiran Malladad August 29, 2012 at 1:33 PM  

Hello Sir

Thanks for the Valuable information it was worth of sharing ur knowledge with everyone

Thanks
regards
Kiran Malladad

Anonymous,  September 6, 2012 at 4:03 AM  

It is really a good article for public.thanks

Dr.Sudhakaran,  September 8, 2012 at 8:54 AM  

Dear Mr.Kumaran,
The intricacies of sensex and nifty indices are explained in a lucid manner.Congrats for the same.The tricks of the trading if available in such simple form will be a boon.
Regards
Sudhakaran

Sridhar Gopalakrishnan September 16, 2012 at 5:45 AM  

Thanks Kumaran for explaining this in simple terms..
I have a question though on tha last part where you talked about growth.
If the growth of companies is 10% , how is that the Sensex moves to 13*1000 from 12*900?

Please explain this part as you get time..
Regards
Sri

harika,  November 16, 2012 at 11:36 PM  

thanks sir,The most essential knowledge for a trader being explained in simple terms. Which helped me a lot.

satyapriya January 10, 2013 at 5:04 AM  

Dear Kumaran,
It is indeed a splendid work by you. i was wondering in internet regarding how the stock indices are calculated and was surprised to see an article giving very clear-cut and precise idea. Very good work by you.
Keep it up

Regards
Satyapriya B S Panda

misheeta March 13, 2014 at 5:11 AM  

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Dr. Sisira Mishra May 8, 2014 at 5:45 AM  

Can anyone say what is the exact market capitalization at BSE during 1978-79, so that one can accurately calculate SENSEX without error ?

Stephy Wilson October 14, 2014 at 6:23 AM  

Very Good blog and awesome writing too , and great thanks to the writer

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