SENSEX
The SENSEX, All that I knew a few weeks back
was that the Sensex was at 24500 points, and now it is at 8000 points. What
exactly are these points? How are they calculated? What is Sensex? What is
happening in the financial world?
A question for answers to these questions helped me in understanding the market scenario. Now when I watched TV, I am able to understand what they are speaking about.
A question for answers to these questions helped me in understanding the market scenario. Now when I watched TV, I am able to understand what they are speaking about.
A Small Story
Suppose, I bought a hotel, say for ₹100 lakhs Rupees Then I manage the hotel
successfully for one year with high profit, say 20 lakhs. The profit continues
for the next year also. So the establishment can be considered as an investment
which gives profit in interest. Now how much is my hotel worth? If I plan to
sell, there might be a buyer who might offer ₹150 lakhs, considering the
fact that the hotel is already running successfully yielding a profit of ₹20
lakhs/year, and the profits might be increase. So I plan to sell it at 150
lakhs.
There might be 15 buyers willing to buy. But
none has ₹150 lakhs. So, I plan to sell
’shares’ in the hotel. I can sell one share at ₹10 lakhs to each of the
ten buyers. Or I can divide the ownership into 1000 shares, at 15000 each. Or I
can have 500 shares for myself and sell the others. This will help me retain a
majority of shares, and remain in control of the hotel establishment. This is
the basics of what Shares are.
A different scenario. I need to start a hotel.
I don’t have money to invest. So I request the public for money. This is called
initial public offering (IPO). I can sell 1 lakh
shares at ₹100 each, to get ₹100
lakh “Rupees immediately. This money I use to build and establish a hotel. The
first year I get a profit of ₹20 lakh. I can do two things with this. I
can share the profit with all shareholders, giving a ‘dividend’ of ₹20.
Or I can save profits for further development of the company, which in turn will
increase the company’s value and the share value. A shareholder can then sell
his share and get profit (or loss, if the company’s value goes down).
Shares of public companies are bought and sold
in stock exchanges. The Bombay Stock Exchange (BSE) with listed
30 national companies is the oldest and the largest stock exchange in India. The
index that BSE uses is called the Sensex.
Free
float market capitalization
An understanding of the Sensex requires the
knowledge about ‘free flow market capitalization’. The word ‘Capitalization’
or ‘Market Capitalization’ of a company refers to the ‘net worth’
of the company. This includes the total assets of a company. This is
actually equal to the share price times the number of shares outstanding of a public
company.
All shares of a public sector undertaking (PSU)
company will not be available for the public to buy or sell. Some shares might
be held by the founders or directors, the government might own some shares, and
associate companies might own some, and so on. The free float shares refer to
the shares that are available for trade in the open market. The free flow
market capitalization is the total value of all shares that are available for
trade by public.
Ø Specifically, the following
categories of holding are generally excluded from the definition of free-float:
Ø Shares held by founders/directors/ acquirers
which has control element
Ø Shares held by persons/ bodies with
“Controlling Interest”
Ø Shares held by Government as promoter/acquirer
Ø Holdings through the FDI Route
Ø Strategic stakes by private corporate bodies/
individuals
Ø Equity held by associate/group companies
(cross-holdings)
Ø Equity held by Employee Welfare Trusts
Ø Locked-in shares and shares which would not be
sold in the open market in normal course.
The remaining shares come under the free-float category.
The remaining shares come under the free-float category.
Free
float factor:
The percentage of free float shares
among the total number of shares is calculated for every indexed company, based
on the information specified by them regarding their shares. This percentage is
rounded off to the higher multiple of 5. The corresponding fraction is the free
float factor.
Let 44% of all shares come under the free float
category, 44% when rounded off to the nearest multiple of 5 gives 45%.
ü The corresponding factor is 0.45.
ü The free float factor is 0.45
ü This free float factor means that
only 45% of the total market capitalization of the company will be taken for
index calculation.
SENSEX
Calculation
Sensex is calculated taking into consideration stock
prices of 30 different BSE listed companies. This means that the level of
index at any point of time reflects the market value of its 30 component stocks
relative to a base period. The year 1978-79 is considered as the base period
and the base value has been set to 100 index points.
Sensex value = Current free-float market value
of constituents stocks / Index Divisor
The Index Divisor adjusts the original base
period of the Sensex to its present level. The Divisor is the only link to the
original base period value of the Sensex. This keeps the Sensex comparable over
time.
ü The calculation is ‘claimed’ to be
simple, involving basic mathematical concepts of ratios and proportions. If the
free-float market capitalization is ₹ 9,00,000 crore and if the Sensex value is
14,500 — then, for a free-float market capitalization of ₹9,50,000 crore.
ü 9,50,000 x 14,500 / 9,00,000 = 15,306
(approx.)
ü The Sensex value will be 15,306
ü [Not much is known about the Index
Divisor value. The value has not been released publicly, and there are doubts
whether the divisor is a true constant or not. As far as known, the value lies
somewhere close to 63 to 64. ]