Saturday, January 31, 2015


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Share Index
After a private company goes public, through Initial Public Offering (IPO), or become a public company, it is important to know about how the 'public company' is working. Would it be better to invest in that particular company than some other? For facilitating investors interests, the concept of share market index has aroused.

Indian version of the share index is Sensex (Sensitive Index, coined by Indian stock market analyst, Deepak Mohoni). It is maintained by Bombay Stock Exchange (BSE) in Mumbai, the business capital of India. It takes care of 30 financially sound and well-established Indian public companies shares or stocks (already discussed about shares in previous post 'Equity & Debt')

Now, let's clear about primary and secondary market.

  • Primary Market - You buy shares from company itself
  • Secondary Market - You buy shares from some other shareholder, rather than the company, meaning the share is already gone through the Primary market.

Types of Shares
Before going to how you could calculate sensex, it is important to know about different types of shares -
  • Restricted Shares - restricted to its own employees, or insiders, cannot be issued to public without special permission
  • Float Shares - freely bought of sold in public (consider as floating in public market)
  • Outstanding Shares - represents all the shares the company actually issued, either to the public or to its own employees (meaning, restricted shares + float shares)
  • Authorized Shares - maximum share that a company can issueShareholder's Vote is necessary to increase or decrease it. 

    Now clear this types with a suitable example -

    Suppose company X has 1,000 Authorized shares. But, it issued 300 shares to public (Float Shares), 200 shares to own employees/executives (Restricted Shares), and retained remaining 500 shares in its treasury
    Therefor, Outstanding shares makes to 300 + 200 = 500 shares

    Sensex Calculation - free-float capitalization method

    Step 1 - Find Market Capitalization (no. of outstanding shares x price per share)
    Step 2 - Multiply with free-float factor (which is determined by percentage of floated shares to outstanding shares)

    Now, think do a public investor need to know about the shares that are kept in the treasury of the company, while investing? Answer is no. What shares are in the public market (floating share) is important instead.

    From the above example
    Percentage of floating shares to outstanding shares = (floating / outstanding) x 100 %
    = (300 / 500) x 100 %  =  60 %
    This percentage makes free-float factor = 0.6

    Now, suppose the price of each share of the company X is Rs. 150. Then market capitalization of the company is = outstanding shares x price per share
    = 500 x Rs. 150  =  Rs. 75,000

    Therefore, the free-float market capitalization becomes = market cap x free-float factor
    = Rs. 75,000 x 0.6  =  Rs. 45,000

    Note - This is a demonstrative example, not actual figure, just for learning purpose.

    While Sensex is the name of the share index of 30 companies in S&P BSE, CNX Nifty is the name of the share index of 50 companies of S&P National Stock Exchange (NSE)

    S&P - Standard & Poors, an international financial services company
    CNX - CRISIL NSE Index

    Hope this post will help you clear a lot of doubts.
    If you like reading this blog, please like and share

    Happy learning!

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