How Stock Market Index Is Calculated? [Explained]

How Stock Market Index Is Calculated

The way how stock market index is calculated is largely classified into Sensex and Nifty. From whichever method you calculate, you are going to arrive at a similar index value. Before actually calculating the stock index, there are a few common conceptions that will help you with your clarification.

Types of Stock Market Index

Learn about Stock Market Index types in detail to understand its calculation better.

Stock Indices by Weightage

  • Market-Capitalization Weighting
  • Free-float adjusted Market-Capitalization Weighting
  • Price Weighting
  • Equal Weighting
  • Fundamental Factor Weighting
  • Factor Weighting
  • Volatility Weighting
  • Minimum Variance Weighting

Stock Indices by Coverage

  • Country Coverage
  • Regional Coverage
  • Global Coverage
  • Exchange-based Coverage
  • Sector-based coverage

How Stock Market Index is Calculated?

There are two ways to calculate the stock market index.

1. Sensex Method

Market Capitalisation equals Total shares * price of each share

Free Float Market Capital of the index equals Market Capitalisation * Free floats of the company at the rate of its total shares.

Stock Index Value = Total free-float market capitalization of the index/ Base year index value x 100

Let’s take an example.

Company A has 100 shares out of which 60 are free-floating.

The price of each share is Rs. 400.

B has 1,000 shares. 700 of which are free-floating.

The price of each share of B is Rs100.

Market capitalisation of A = 40,000.

Market capitalisation of B = 100,000.

Free float of A = 0.60

Free float of B = 0.70.

Total free float market capital of the index = 40,000 x 0.60 + 100,000 x 0.70 = 94,000.

Let’s assume, the base year index to be 5,000.

The value of the index will be 94,000 x 100/5,000 =1,880.

2. Nifty Method

Nifty calculations are not too different from Sensex. Here’s the formula.

  • Market Capitalization = Equity Capital * share value
  • Free float market capitalization = Equity Capital * Price * Investible Weight Factor
  • Stock Index = Current market value/ Base Market Value x Base Index Value (1000)

Bottom Line

This is how stock market index is calculated. Once you are clear on your stock indices terms, you will understand the market index easily.

Let us know if you have any queries regarding the calculation in the comments below.

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