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WHAT IS 'Sensex'

Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE) in India. Sensex is composed of 30 of the largest and most actively-traded stocks on the BSE, providing an accurate gauge of India's economy. Initially compiled in 1986, the Sensex is the oldest stock index in India. Analysts and investors use the Sensex to observe the overall growth, development of particular industries, and booms and busts of the Indian economy.

BREAKING DOWN 'Sensex'

Sensex experienced enormous growth in the first decade of the 21st century, rising from a close of 3,377.28 in 2002 to one of 20,286.99 in 2007. This reflects India's gross domestic product (GDP) growth since the turn of the century, which ranks as one of the fastest in the world. According to International Monetary Fund (IMF) estimates, India's GDP grew rapidly between 2002 and 2007, and then stunted a bit in 2008, in stride with the global financial crisis of that year, but was back on a strong  growth rate in 2010. India’s growing GDP owes much credit to the rise of the Indian middle class, which stood at less than 1 percent of the global middle class in 2000 but is expected to account for 10 percent by 2020. The middle class is an important driver of consumption demand.

Free-Float Capitalization Method

The Sensex is calculated based on a free-float capitalization method, which provides a weighting for the effect of a company on the index. This is a variation of the market cap method, but instead of using a company's outstanding shares, it uses its float, which is the number of shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by company insiders, which can't be readily sold.

To find the free-float capitalization of a company, first find its market cap, which is the number of outstanding shares multiplied by share price, then multiply its free-float factor. The free-float factor is determined by the percentage of floated shares to outstanding. For example, if a company has a float of 10 million shares and outstanding shares of 12 million, the percent of float to outstanding is 83 percent. A company with an 83-percent free float falls in the 80 to 85 percent free-float factor, or 0.85, which is then multiplied by its market cap. Twelve million shares multiplied by $10 a share, then multiplied by 0.85 equals $102 million in free-float capitalization.

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