How is an Index Constructed?

-Three basic ingredients have to be judged:
1.    Base year for measurement
2.    Number of companies to be included
3.    Base value (For eg: 10/100/1000)

-For BSE Sensex:
-    Base year: 1978-79
-    Number of companies: 30
-    Base value: 100
-    Date of launch: January 1, 1986 (baseline to 1978-79)
-    Index calculated every 15 seconds

No written rule which specifies number of companies to be included or base value to be consider (Sensex considered 100 as it was neither too large nor too small a value)


On what basis are companies chosen to be part of an Index?
-    Composition of the companies in an index can keep changing periodically
-    Some factors on which the decision to include a company depends on:
o    Size of free float market capitalization
o    Frequency of trading
o    Listed history and track record
o    Industry representation
-    When the BSE Sensex was originally formed, it used the weigh of market capitalization of companies, but from September 2003 onwards, it shifted to the free-float market capitalization method.

Subscribe to Ashwin Group

Email:

Visit this group