The Sensex and Nifty are "indices of a stock market". There are many other indices other than these indices.
A stock market is a place where you can sell or buy shares or stocks of companies.
An index is basically an indicator which gives us a general idea about stocks going up or down.
The Sensex goes up when prices of stock of major companies on BSE goes up and it goes down when the latter goes down. The same condition applies to Nifty.
These two are the major stock exchanges in the country. Most of the stock trading in the country is done though the BSE & the NSE.
Now coming to how the Sensex and Nifty are calculated:
The Sensex is calculated taking into consideration stock prices of 30 different companies listed on BSE . It is calculated using the “free-float market capitalization” method. This is one of the best methods for calculating a stock market index.
The 30 companies that are taken into consideration are changed from time to time. This is done to make the Sensex an accurate index.
Which 30 Companies:
The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”.
This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.
This committee follows a list of certain criteria to do so.
In the order , we need to understand what Market Capitalization is :
Market Capitalization is the worth of a company in term of it's shares. To get the market capitalization of a company we simply multiply the current price of a share with total number of shares issued by the company.
Now we can understand what the Free Float Market Capitalization Method is:
Many types of investors hold shares of a company. But only the "open market shares" of a company are available for trading in stock markets. A company provides list of all it's shareholder to BSE.
BSE has it's certain set of measures through which it decides how many share of the company falls under "open market shares".
So the Free Float Market Capitalization is the total amount we have to pay for buying all the open market shares of a company.
Once we find the Free Float Market Capitalization, we are very close to findig the sensex.
All we need to do is to find the total Free Float Market Capitalization of all the 30 companies and add them. Now use method of ratios and proportions to relate the current value of sensex to sensex base.
What I mean to say is:
Suppose, for a “free-float market cap” of Rs. 50,000 Cr... the Sensex value is 4000…
Then, for a “free-float market cap” of Rs.150,000 Cr... the Sensex value will be..
The Nifty uses stocks of 50 companies....