F or the premier Bombay Stock Exchange that pioneered the stock broking activity in India, years of experience seems to be a proud milestone. A lot has changed since when persons became members of what today is called The Stock Exchange, Mumbai by paying a princely amount of Re 1.

Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market.

The Stock Exchange, Mumbai in came out with a stock index that subsequently became the barometer of the Indian stock market. Sensex is not only scientifically designed but also based on globally accepted construction and review methodology.

How to calculate the Sensex PE

First compiled in , Sensex is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.

The base year of Sensex is and the base value is The index is widely reported in both domestic and international markets through print as well as electronic media. The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally.

Explanation with an example Due to is wide acceptance amongst the Indian investors; Sensex is regarded to be the pulse of the Indian stock market.

As the oldest index in the country, it provides the time series data over a fairly long period of time From onwards.

Small wonder, the Sensex has over the years become one of the most prominent brands in the country. The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The Sensex captured all these events in the most judicial manner.

One can identify the booms and busts of the Indian stock market through Sensex. Sensex Calculation Methodology Sensex is calculated using the "Free-float Market Capitalization" methodology.

As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period.

The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.

The base period of Sensex is and the base value is index points. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc.

During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real time.

Dollex BSE also calculates a dollar-linked version of Sensex and historical values of this index are available since its inception. Understanding Free-float Methodology Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index.

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Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.

In India, BSE pioneered the concept of Free-float by launching BSE TECk in July and Bankex in June While BSE TECk Index is a TMT benchmark, Bankex is positioned as a benchmark for the banking sector stocks. Sensex becomes the third index in India to be based on the globally accepted Free-float Methodology. Suppose company A has 1, shares in total, of which are held by the promoters, so that only shares are available for trading to the general public.

These shares are the so-called 'free-floating' shares. Similarly, company B has 2, shares in total, of which 1, are held by the promoters and the rest 1, are free-floating.

Now suppose the current market price of stock A is Rs Thus, the 'total' market capitalisation of company A is Rs , 1, x , but its free-float market capitalisation is Rs 96, x Similarly, suppose the current market price of stock B is Rs The total market capitalisation of company B will thus be Rs , 2, x , but its free-float market cap is only Rs , 1, x So as of today the market capitalisation of the index i.

The year is considered the base year of the index with a value set to What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60, remember at that time there may have been some other stocks in the index, not A and B, but that does not matter , then we assume that an index market cap of 60, is equal to an index-value of