The stock market fluctuates daily. Someday it rises high and someday reaches rock bottom. There are several 
stock indexes across the globe i.e. S&P 500, Dow Jones, Nikkei 225, Sensex, Nifty, etc.
These indexes are the statistical weighted average of few major companies listed under them. Sensex is calculated based on 30 companies and Nifty on 50 companies. It will be easier to understand with an example.
Assume the calculation for an Index called ABC ( I will take very small fictional numbers so that there is no confusion)
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ABC takes into consideration 3 companies ( just for simple calculation). These companies are available for trading. FREE-FLOAT MARKET CAPITALISATION METHOD IS USED TO CALCULATE INDEX. It is simply multiplying the number of shares available to public with the current market price of the share.
Eg: XYZ company with 2000 shares, out of which only 1500 shares available for public trade at market price Rs. 120/- per share
=1500*120= Rs.180,000 Free Float Market capitalisation
MNO company with 3000 shares, out of which only 2000 shares available for public trade at market price Rs. 500/- per share
=2000*500= Rs.1000,000 Free Float Market capitalisation
PQR company with 1000 shares, out of which only 800 shares available for public trade at market price Rs. 200/- per share
=800*200= Rs.160,000 Free Float Market capitalisation
So, total Free Float Market Capitalisation = 180,000+1000,000+160,000=1,340,000
Now, the year ABC INDEX had begun or the BASE YEAR it would have the initial Market Cap value like the one we calculated now. (eg: Sensex’s base year is 1978-79)
So now we take 2 assumptions about base year and its Market Cap
- Base year: 2000-01
- 2. Market Cap: Rs.200,000
The base year Market Cap is considered 100. So daily or within every few minutes how much the Market Cap has increased or decreased to that base year is calculated
Calculation of ABC INDEX: 1,340,000* 100/200,000= 670 points
Tomorrow if the share prices of companies change and the Free Float Market Cap changes from Rs.1,340,000 to Rs.1,335,000 then how the changes are shown?
Calculation: 1,335,000* 100/200,000= 667.5 points
The Stock Market Index has gone down from 670 points to 667.5 points, i.e. the market is down by 2.5 points
Percentage Decrease = 2.5/670*100 = 0.37%
So, that’s how you get the news: The Market Today is at 667.5 points, down by 2.5 points or 0.37%.
Please do give me your feedback about the article and if you have any more doubts you want to be clear on. Thankyou.
DVP
FinancialDoodle 
Good work Dhrishya.. Would you be kind enough to send me a test mail.. Need to talk to you regarding your blogs and more.. thanks
Ashish
Myfinmentor.org
Co-founder
thanks ashish.. Please give me your mail Id
Mam,
Your article provide such a basic understanding with as much clarity that cannot be found over net.thanks for your effort.
I hope you will provide us some depth knowlege of adjustment calculation with respect to change in sensex in case of right issue and bonus with its importance.
hi,
nice article..! but i just have a small doubt.. what is that ‘100’ u multiply with on the numerator?
Hi Ashutosh.. an article woould be written on your given topic in a future date after a thorough study. Thanks for your feedback
Hi Kayal,
100 is the base points. As Today Sensex has reached more than 19k points but its origin had started from 100 points. Today if a new index is started the its starts from 100 and likewise with every addition of capital in the future the point increases but it is always compared to the and amount year it was started or decided upon for calculation. Hope you understood what I said. Thanks for your feedback
market capitalisation of base year is the total shares of companies multiplied by there share prices in the year that index was started ,,,,,in case of sensex that is 100,,,,,am i right if not please correct me,,,,,
hi Amanullah, yes the base index of BSE Sensex is 100 (1978-79) and Market capitalisation = No. of shares * Market Share prices of 30 companies for BSE sensex
hi dhrishya.. i learnt it very easy way thanks a lot.
i would like to talk to you.
kindly send me a mail
Thankyou. My email id is drish_rej@yahoo.co.in
Lets say I Buy 100,000 worth of shares and someone else buys 50,000 and the stock points go up 5.00% would I gain more because I put more also can you contact me back because I want to know in higher detail what is the base year and market cap
Hi Roger,
Any company could be profiting or at loss when a General Stock Point is up by 5%. If the company you have invested is gaining good in the market, then definitely one who has higher quantity of its stock will have higher profits.
You can post your doubts on facebook page: https://www.facebook.com/pages/Financial-Doodle/149704291772664
thanks friends. it was a great help to me.
Hello dhrishya,
Here in you example you assjmed market cap to be 200,000.But in real world how is it taken?
Hello dhrishya,
Here in you example you assumed market cap to be 200,000.But in real world how is it taken?
Hey Vishal,
All that is explained in this artice briefly… you need to read it thoroughly again and again if you find it difficult to understand.
In real world, Sensex’s calculation is based on the movements of 30 major companies. The movement is calculated by Free float market capitaisation method.. which is again explained in this article. Further which companies and real calculation… that you will have to research yourself.