Let’s learn about the index and how an index is calculated?

Kiran Shroff
/ Categories: Knowledge, General
Let’s learn about the index and how an index is calculated?

These could be constructed as a broad-based index that captures the entire market, such as a small-cap index, mid-cap index, large-cap index, etc.

What is an index? 

An index is a standardized method of tracking the performance of a group of assets. These could be constructed as a broad-based index that captures the entire market, such as a Small-Cap index, Mid-Cap index, Large-Cap index, etc. The index is also created to measure other financial or economic data, such as interest rates, inflation or manufacturing output. The index is frequently used as a benchmark against which to compare the performance of a portfolio's returns. 

 

What are BSE Sensex and Nifty-50? 

The Sensex "Stock Exchange Sensitive Index" shows the market performance of the top 30 Indian companies by market cap. Nifty-50 is calculated based on the performance of the top 50 stocks trading on Nifty. 

  

How are BSE Sensex and Nifty-50 calculated? 

The value of BSE Sensex and Nifty-50 is calculated on the basis of the combined market cap of the companies listed on the respective indices. 

The formula for calculating the market cap of companies = (Number of Outstanding shares of company x Price per share). 

Applying this formula to all the companies will give us the combined market cap of the respective indices (i.e. BSE Sensex and Nifty-50) 

Now divide the combined market cap by the base value of the Indices. 

Let us consider a hypothetical example- BSE Sensex has a combined market cap of 1 lakh and a base value of 100. 

= BSE Sensex’s combined market cap/base value of Sensex. 

=1,00,000/100 = 10,000 

  

How to calculate the weightage of companies on the BSE Sensex or Nifty-50? 

The weightage of the company on the index depends upon its market cap. Let us again consider the above example but here the market of the company is the key factor. 

BSE Sensex Market Cap    = 100000 

Company A’s Market cap = 10000 

Weightage of the company on index = (Company A’s market cap/ BSE Sensex’s market cap) x 100 

                                                              = (10,000/1,00,000) x 100 

                                                              = 10 per cent. 

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