BSE Sensex (or Bombay Stock Exchange Sensitive Index) is the prime and older indicator of stock market trend in India (the other being the Nifty Fifty). It consists of 30 stocks representing a wide cross-section of industries and is considered the belweather index for Indian stocks. It is calculated using a well attested method called free float market capitalization.

What is Free Float Market Capitalization?

Simply put its the market capitalization of all shares in "free float!!!" Free float shares are those that are available for trading in the open market. They rest may be FDI holdings, promoter holdings, locked in shares, strategic stakes, ESOPs etc. Suppose 40% of all shares is openly available. A free float factor is decided by BSE which would be 0.4 (anything in the band of above 35% -40% would have this factor). This factor is multiplied with the total market capitalization of the company (which is the prevailing share price * total no. of shares issued by the company) to get the free float market capitalization.

How to Calculate Sensex

You know how to find the free float market cap of a company. Now add these for all the 30 companies that constitute the Sensex. You have the total free float market capitalization for the Sensex. The Sensex value is this value relative to a base period. The Base period is 1978-79 and the Base value is 100. The Free-float market Cap is divided by a number called the index divisor to arrive at the right value of Sensex. This divisor factors in changes in scrips, dividend paid, etc. A simple way to find the current index divisor would be calculating the previous day's free-float market cap / previous day's sensex.

Free Float Market cap (prev day) = 320000 cr

Sensex Value = 16000

Div = 320000 / 16000 = 20

Current Free Float Market Cap = 336000

Current Sensex Value = 336000/20 = 16800

Here's your Sensex Value - 16800!