Answer / kuldeep dave

Many different types of investors hold the shares of a
company! The Govt. may hold some of the shares. Some of the
shares may be held by the “founders” or “directors” of the
company. Some of the shares may be held by the FDI’s etc. etc!

Now, only the “open market” shares that are free for trading
by anyone, are called the “free-float” shares. When we are
calculating the Sensex, we are interested in these
“free-float” shares!

A particular company, may have certain shares in the open
market and certain shares that are not available for trading
in the open market.

According the BSE, any shares that DO NOT fall under the
following criteria, can be considered to be open market shares:

* Holdings by founders/directors/ acquirers which has
control element
* Holdings by persons/ bodies with "controlling interest"
* Government holding as promoter/acquirer
* Holdings through the FDI Route
* Strategic stakes by private corporate bodies/ individuals
* Equity held by associate/group companies (cross-holdings)
* Equity held by employee welfare trusts
* Locked-in shares and shares which would not be sold in
the open market in normal course.

A company has to submit a complete report about “who has how
many of the company’s shares” to the BSE. On the basis of
this, the BSE will decide the “free-float factor” of the
company. The “free-float factor” is a very valuable number!
If you multiply the "free-float factor" with the “market
cap” of that company, you will get the “free-float market
cap” which is the value of the shares of the company in the
open market!

A simple way to understand the “free-float market cap” would
be, the total cost of buying all the shares in the open market!

So, having understood what the “free float market cap” is,
now what? How do you find out the value of the Sensex at a
particular point? Well, it’s pretty simple….

First: Find out the “free-float market cap” of all the 30
companies that make up the Sensex!

Second: Add all the “free-float market cap’s” of all the 30
companies!

Third: Make all this relative to the Sensex base. The value
you get is the Sensex value!

The “third” step probably confused you. To understand it,
you will need to understand “ratios and proportions” from
5th standard mathematics. Think of it this way:

Suppose, for a “free-float market cap” of Rs.100,000 Cr...
the Sensex value is 4000…

Then, for a “free-float market cap” of Rs.150,000 Cr... the
Sensex value will be..

Sensex calculation!

So, the Sensex value will be 6000 if the “free-float market
cap” comes to Rs.150,000 Cr!

Please Note: Every time one of the 30 companies has a “stock
split” or a "bonus" etc. appropriate changes are made in the
“market cap” calculations.

Answer / simran

Under the 'full-market capitalization' methodology, the
total market capitalization of a company, irrespective of
who is holding the shares, is taken into consideration for
computation of an index. However, if instead of taking the
total market capitalization, only the Free-float market
capitalization of a company is considered for index
calculation, it is called the Free-float methodology. Free-
float market capitalization is defined as that proportion
of total shares issued by the company which are readily
available for trading in the market. It generally excludes
promoters' holding, government holding, strategic holding
and other locked-in shares, which will not come to the
market for trading in the normal course. Thus, the market
capitalization of each company in a Free-float index is
reduced to the extent of its Free-float available in the
market.

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