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 calculated 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.
What is Free-float Methodology
Free-float methodology is an index construction methodology that considers only the free-float market capitalization of a company for the purpose of index calculation. Free-float market capitalization considers only those shares issued by the company that are readily available for trading in the market. It 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.
Scrip Selection Criteria for BSE Sensex
Listed History: The scrip should be listed at BSE for a minimum of 3 months. Exception can be made if full market capitalization of a newly listed company ranks among top 10 in the list of BSE. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.
Trading Frequency: The scrip should have been traded on each and every trading day in the last three months at BSE. There can be exceptions in case of extreme reasons like scrip suspension etc.
Final Rank: The stock should figure among the top 100 companies listed by final rank. The final rank is calculated by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.
Market Capitalization Weightage: The minimum weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be 0.5% of the Index.
Industry/Sector Representation: Scrip selection is generally based on a balanced representation of the listed companies in the universe of BSE.
Track Record: The company should have an acceptable track record.