Sensex Calculation Methodology: Free-Float Market Capitalization

The BSE Sensex, also known as the Sensitive Index, is one of the most widely recognized indicators of stock market performance in India. Introduced by the Bombay Stock Exchange (BSE) in 1986, the Sensex tracks the performance of 30 large, financially strong, and established companies from various sectors of the Indian economy. These companies collectively provide a representative picture of overall market conditions.

Today, Sensex is calculated using the free-float market capitalization method—an internationally accepted methodology used by leading global index providers such as MSCI, FTSE, STOXX, S&P, and Dow Jones.
This blog post provides a deep, clear, and structured explanation of how the Sensex is constructed, how free-float market capitalization works, and how index values are mathematically determined.

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1. What Is Free-Float Market Capitalization?

Free-float market capitalization is a method of calculating a company’s market value based only on the shares that are freely available for trading in the open market.

Not all shares issued by the company can be traded freely. Some shares are locked-in or held for long-term strategic purposes. Such shares are excluded from free-float calculations.

1.1 What Shares Are Included in Free-Float?

Free-floating shares include:

• Shares held by general public

• Shares held by retail and institutional investors

• Shares available for trading on stock exchanges

1.2 What Shares Are Not Included?

The following categories are excluded from free-float:

• Promoter holdings

• Government-controlled shares

• Employee stock options (ESOPs) not yet vested

• Strategic investments

• Shares under lock-in

• Foreign direct investment stakes (FDI)

• Cross-holdings

1.3 Formula for Free-Float Market Capitalization

$$\textbf{Free-Float Market Cap} = \text{Total Market Cap} \times \text{Free-Float Factor}$$

Where:

$$\text{Total Market Cap} = \text{Share Price} \times \text{Total Shares Outstanding}$$

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2. Free-Float Factor Assigned by BSE

BSE assigns a free-float factor to each Sensex company. This factor varies from 0.05 to 1.00, depending on the proportion of shares available for public trading.

2.1 Example of Free-Float Factor Bands

% Free-Floating Shares	Free-Float Factor Assigned
0 – 5%	0.05
5 – 10%	0.10
15 – 20%	0.20
35 – 40%	0.40
45 – 50%	0.50
75 – 80%	0.75

For example, if a company has 40% free-floating shares, BSE assigns a factor of 0.40.
This ensures that only the tradable value of the company affects the index.

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3. How Is the Sensex Calculated?

Sensex is calculated using the formula:

$$\textbf{Sensex} = \frac{\text{Total Free-Float Market Capitalization of 30 Companies}}{\text{Index Divisor}}$$

3.1 Key Components of Sensex Calculation

Component	Explanation
Free-Float Market Cap	Sum of free-float market cap of all 30 Sensex companies
Base Year	1978–79
Base Value	100
Index Divisor	A constantly adjusted number to maintain continuity

3.2 Why Is the Index Divisor Important?

The index divisor ensures that Sensex remains comparable over time.

It is adjusted whenever:

• Companies are added or removed from the index

• Stock splits occur

• Bonus shares are issued

• Rights issues take place

• Mergers or acquisitions happen

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4. Step-by-Step Sensex Calculation Example

Let’s consider a simplified example to understand how Sensex is determined.

4.1 Previous Day Data

• Total free-float market cap (previous day): ₹320,000 crore

• Previous day’s Sensex value: 16,000

Step 1: Calculate Index Divisor

$$\text{Divisor} = \frac{320000}{16000} = 20$$

4.2 Today’s Data

• Current free-float market cap: ₹336,000 crore

Step 2: Calculate Today’s Sensex

$$\text{Sensex Today} = \frac{336000}{20} = 16800$$

📌 Conclusion:
Today’s Sensex is 16,800.

This simple example demonstrates how even small changes in market cap translate into Sensex movements.

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5. History and Evolution of the BSE Sensex

5.1 Formation of BSE

• The Bombay Stock Exchange was formed in 1875

• Originally known as “The Native Share and Stock Brokers Association”

• Membership fee: Re. 1

• It is Asia’s oldest stock exchange

5.2 Birth of Sensex

• Launched in 1986

• Considered the first equity index in India

• Created as an objective measure of market movement

• Initially used full market capitalization method

5.3 Adoption of Free-Float Method (2003)

In 2003, Sensex officially shifted from Full Market Cap to Free-Float Market Cap methodology.

Reasons:

• Better reflects market realities

• Reduces influence of promoter-heavy companies

• Aligns with global standards

• Improves index reliability

Today, almost all major Indian and global indices use the free-float model.

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6. Why Free-Float Methodology Is Superior

6.1 Advantages of Free-Float Market Cap

Benefit	Explanation
More accurate reflection of market sentiment	Only considers tradable shares
Global acceptance	Used by MSCI, FTSE, S&P, Dow Jones
Reduces bias	Prevents companies with high promoter holdings from skewing the index
Improved transparency	Clear rules for share categorization
Efficient index construction	Better weighting of companies

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7. Sensex During Major Market Phases

The Sensex has witnessed various bull and bear markets over decades:

Important Milestones

Year	Event	Sensex Behavior
1991	Economic Liberalization	Rapid upward trend
1992	Harshad Mehta Scam	Sharp boom and crash
2000	Dot-com Burst	Massive correction
2008	Global Financial Crisis	Sensex fell ~50%
2020	COVID-19 Crash	Fastest fall in history
2021–22	Record Bull Run	New all-time highs

Sensex continues to act as the pulse of Indian equity markets, reflecting economic cycles and investor confidence.

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8. Dollex-30: The Dollar Version of Sensex

The Dollex-30 is a dollar-denominated version of the Sensex.

Purpose of Dollex-30

• Helps foreign investors analyze returns in USD

• Removes the effect of rupee depreciation/appreciation

• Used by global analysts and international funds

Historical data of Dollex-30 is available since launch, helping compare global and domestic market performance.

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9. Free-Float Methodology Explained with a Detailed Example

To simplify free-float calculations, consider a two-stock index:

9.1 Free-Float Data

Company	Total Shares	Promoter Shares	Free-Float Shares
A	1,000	200	800
B	2,000	1,000	1,000

9.2 Market Price and Market Capitalization

Company	Price (₹)	Total Market Cap	Free-Float Market Cap
A	120	1,000×120 = 1,20,000	800×120 = 96,000
B	200	2,000×200 = 4,00,000	1,000×200 = 2,00,000

9.3 Index Market Cap

• Total Market Cap = 1,20,000 + 4,00,000 = 5,20,000

• Free-Float Market Cap = 96,000 + 2,00,000 = 2,96,000

9.4 Index Base Year

• Base year: 1978–79

• Base value: 100

• Base market cap: Assume ₹60,000

9.5 Sensex Value Today

$$\text{Sensex Today} = \frac{296000 \times 100}{60000} = 493.33$$

This illustrates how Sensex represents the percentage increase in market value since 1978–79.

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10. Conclusion

The Sensex, India’s most respected equity index, provides a reliable measure of stock market performance through its globally recognized free-float market capitalization methodology. By considering only the shares available for public trading, the index offers a transparent and accurate reflection of real market activity.

Key takeaways:

• Sensex measures changes in the market value of 30 large companies

• Uses free-float market capitalization, not full market cap

• The index divisor maintains long-term continuity

• Updated every 15 seconds during trading hours

• Reflects economic trends, investor sentiment, and market cycles

• Has become a premium benchmark globally

With over four decades of data, Sensex remains the pulse, identity, and backbone of India’s equity markets.