Value-weighted Indexes: Unlike in a price weighted index, in a value weighted index, the weights are based on the market cap of the stocks.
Both Sensex and Nifty are value-weighted indexes. While estimating Sensex, BSE also takes into account the free float factor.
To illustrate how value-weighted indexes are computed, lets look the 50 shares Nifty first.
The total value of the 50 shares included in Nifty as on April 7, 2005 is Rs.958708.3 crores.
This is approximately 60% of the total market value of all the stocks listed in NSE.
Weight can be calculated using the formula
Weight of a company=Market cap of the stock/Total market of all the fifty stocks.
For example the market cap of a company say ABC is Rs.5212.94 crores.
Then the weight of that particular company will be 5212.94/958708.3=0.0054=0.54%
Note that market-value-weighted indexes are unaffected by stock splits.
Computation of Sensex: Like Nifty, Sensex is also a value-weighted index.
However, the market cap of each stock is multiplied with what is called a free-float factor to arrive at the modified market cap of stocks.
Lets explain the computation of Sensex by using the example of Infosys.
Market cap of Infosys is Rs.59080.73crores as on April 7, 2005.
Free float factor is 0.8 this implies that about 20% of stocks of Infosys are with the promoters of the company.
So the modified market cap will be 59080.73*0.8=Rs.47264.59crores
The combined market cap of all the 30 stocks included in Sensex is Rs.387067.1 crores as against a total market cap of Rs.732212.92 crores.
So the weight of Infosys will be
Rs.47264.59/Rs.387067.1=0.1221=12.21%
(Note that the calculations are based on the 2005 value....)
Regards Hari " लोका समस्ता सुखिनो भवन्तु "
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