We have already discussed different types of stock market indices. Market capitalization is the most common method across the world. The market capitalization method we covered is ‘Full Market Capitalization method’. But in reality, in most of the markets, Full Market Capitalization is not used for calculating market index values. At any time only a part of the total market capitalization is readily available for trading in the market. This is because promoters’ holding, government holding, strategic holding and other locked-in shares will not be available in the market for trading in the normal course.
A company provides the holdings information to the exchanges periodically. The exchanges calculate free-float factor as follows
(No. of shares readily available for trading in the market) / (Total number of shares outstanding)As you know market capitalization = No. of shares outstanding * Market value of a share
Once the free float factor of a company is calculated, it is rounded off to a higher multiple of 5 and the company is categorized into one of the bands below.
% Free – Float Free – Float Factor % Free – Float Free – Float Factor
>0 – 5% 0.05 >50 – 55% 0.55
>5 – 10% 0.1 >55 – 60% 0.6
>10 – 15% 0.15 >60 – 65% 0.65
>15 – 20% 0.2 >65 – 70% 0.7
>20 – 25% 0.25 >70 – 75% 0.75
>25 – 30% 0.3 >75 – 80% 0.8
>30 – 35% 0.35 >80 – 85% 0.85
>35 – 40% 0.4 >85 – 90% 0.9
>40 – 45% 0.45 >90 – 95% 0.95
>45 – 50% 0.5 95 – 100% 1
If a company has a free float factor of 0.47 it is considered as 0.5 and it falls under the band of >45 – 50%. This categorization into different bands is done to avoid frequent changes i.e. In the above example even if the company’s free float increases to 0.49 (or decreases to 0.46) the free float factor to be considered for calculation of index will remain same.
Now the market capitalization of a company gets multiplied by the free-float factor to arrive at free-float market capitalization. Free-float market capitalization is calculated for all index constituents and the index value is calculated against a base value considering total value of free-float market capitalization similar to what we discussed in the other post.
Take a look at the below snapshot of calculation of BSE power sector. Data as at end of trade hours 16th Jan 2009.
This method of calculation is used in Sensex and all sectoral indices except PSU sector. BSE first implemented this methodology in TECk Index, launched in July 2001 and this was the country’s first Free-float index. On 16th June 2003, BSE launched BANKEX on the Free-float methodology. Subsequently, SENSEX and all other BSE indices have started using this methodology.
Mohan Bhupathiraju
Mohan Bhupathiraju is a co-founder & editor at LastBull.com. Handled multiple projects in BFSI for few of the Forbes top 100 companies. He works in IT industry in the US. Presently working on start up Ideas in Finance & Technology niches.
Related posts:
- Types of Stock market indexes – Sensex Nifty calculation
- Stock Selection Criteria for Sensex/NIFTY
- Scrip Selection Criteria for an Index – Sensex/Nifty
- What is Stock market Index
- IPO – Methods of Pricing
Loading ...