sensex calculation

SENSEX is calculated using a "Market Capitalization-Weighted"

methodology. As per this methodology, the level of index at any point of
time reflects the total market value of 30 component stocks relative to a base
period. (The market capitalization of a company is determined by
multiplying the price of its stock by the number of shares issued by the
company). An index of a set of a combined variables (such as price and
number of shares) is commonly referred as a 'Composite Index' by
statisticians. A single indexed number is used to represent the results of this
calculation in order to make the value easier to work with and track over
time. It is much easier to graph a chart based on indexed values than one
based on actual values. The base period of SENSEX is 1978-79. The actual
total market value of the stocks in the Index during the base period has been
set equal to an indexed value of 100. This is often indicated by the notation
1978-79=100. The formula used to calculate the Index is fairly
straightforward. However, the calculation of the adjustments to the Index
(commonly called Index maintenance) is more complex. The calculation of
SENSEX involves dividing the total market capitalization of 30 companies
in the Index by a number called the Index Divisor. The Divisor is the only
link to the original base period value of the SENSEX. It keeps the Index
comparable over time and is the adjustment point for all Index maintenance
adjustments. During market hours, prices of the index scrips, at which latest
trades are executed, are used by the trading system to calculate SENSEX
every 15 seconds and disseminated in real time.

The 'BSE Sensex' or 'Bombay Stock Exchange' is value-weighted index composed of 30

stocks and was started in January 1, 1986. The Sensex is regarded as the pulse of the
domestic stock markets in India. It consists of the 30 largest and most actively traded
stocks, representative of various sectors, on the Bombay Stock Exchange. These
companies account for around fifty per cent of the market capitalization of the BSE. The
base value of the sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is
1978-79.

At regular intervals, the Bombay Stock Exchange (BSE) authorities review and modify
its composition to be sure it reflects current market conditions. The index is calculated
based on a free float capitalization method; a variation of the market cap method. Instead
of using a company's outstanding shares it uses its float, or shares that are readily
available for trading. The free-float method, therefore, does not include restricted stocks,
such as those held by promoters, government and strategic investors.[1]
Initially, the index was calculated based on the ‘full market capitalization’ method.
However this was shifted to the free float method with effect from September 1, 2003.
Globally, the free float market capitalization is regarded as the industry best practice.

As per free float capitalization 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 determined by multiplying the price of its stock by
the number of shares issued by the company. This Market capitalization is multiplied by
a free float factor to determine the free float market capitalization. Free float factor is
also referred as adjustment factor. Free float factor represent the percentage of shares that
are readily available for trading.

The Calculation of Sensex involves dividing the free float market capitalization of 30
companies in the index by a number called Index divisor.The Divisor is the only link to
original base period value of the Sensex. It keeps the index comparable over time and is
the adjustment point for all Index adjustments arising out of corporate actions,
replacement of scrips, etc.

The index has increased by over ten times from June 1990 to the present. Using
information from April 1979 onwards, the long-run rate of return on the BSE Sensex
works out to be 18.6% per annum, which translates to roughly 9% per annum after
compensating for inflation.[2]

MUTUAL FUND DEFINITION

A mutual fund is a professionally managed type of collective investment scheme that

pools money from many investors and invests typically in investment securities (stocks,
bonds, short-term money market instruments, other mutual funds, other securities, and/or
commodities such as precious metals).[1] The mutual fund will have a fund manager that
trades (buys and sells) the fund's investments in accordance with the fund's investment
objective. In the U.S., a fund registered with the Securities and Exchange Commission
(SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly
all of its net income and net realized gains from the sale of securities (if any) to its
investors at least annually. Most funds are overseen by a board of directors or trustees (if
the U.S. fund is organized as a trust as they commonly are) which is charged with
ensuring the fund is managed appropriately by its investment adviser and other service
organizations and vendors, all in the best interests of the fund's investors.
DERIVATIVES DEF:

A financial instrument whose characteristics and value depend upon the characteristics
and value of an underlier, typically a commodity, bond, equity or currency. Examples of
derivatives include futures and options. Advanced investors sometimes purchase or sell
derivatives to manage the risk associated with the underlying security, to protect against
fluctuations in value, or to profit from periods of inactivity or decline. These techniques
can be quite complicated and quite risky.

In finance, a derivative is a financial instrument (or, more simply, an agreement between

two parties) that has a value, based on the expected future price movements of the asset
to which it is linked—called the underlying asset—[1] such as a share or a currency. There
are many kinds of derivatives, with the most common being swaps, futures, and options.
Derivatives are a form of alternative investment.

A derivative is not a stand-alone asset, since it has no value of its own. However, more
common types of derivatives have been traded on markets before their expiration
date as if they were assets. Among the oldest of these are rice futures, which have been
traded on the Dojima Rice Exchange since the eighteenth century.[2]

Derivatives are usually broadly categorized by:

• the relationship between the underlying asset and the derivative (e.g., forward,
option, swap);
• the type of underlying asset (e.g., equity derivatives, foreign exchange
derivatives, interest rate derivatives, commodity derivatives or credit derivatives);
• the market in which they trade (e.g., exchange-traded or over-the-counter);
• their pay-off profile.

Another arbitrary distinction is between:[3]

• vanilla derivatives (simple and more common); and

• exotic derivatives (more complicated and specialized).

Uses

Derivatives are used by investors to:

• provide leverage (or gearing), such that a small movement in the underlying value
can cause a large difference in the value of the derivative;
• speculate and make a profit if the value of the underlying asset moves the way
they expect (e.g., moves in a given direction, stays in or out of a specified range,
reaches a certain level);
• hedge or mitigate risk in the underlying, by entering into a derivative contract
whose value moves in the opposite direction to their underlying position and
cancels part or all of it out;
 • obtain exposure to the underlying where it is not possible to trade in the
underlying (e.g., weather derivatives);
• create option ability where the value of the derivative is linked to a specific
condition or event (e.g., the underlying reaching a specific price level).

What Does Futures Mean?

A financial contract obligating the buyer to purchase an asset (or the seller to sell an
asset), such as a physical commodity or a financial instrument, at a predetermined future
date and price. Futures contracts detail the quality and quantity of the underlying asset;
they are standardized to facilitate trading on a futures exchange. Some futures contracts
may call for physical delivery of the asset, while others are settled in cash. The futures
markets are characterized by the ability to use very high leverage relative to
stockmarkets.

Futures can be used either to hedge or to speculate on the price movement of the
underlying asset. For example, a producer of corn could use futures to lock in a certain
price and reduce risk (hedge). On the other hand, anybody could speculate on the price
movement of corn by going long or short using futures

Investopedia explains Futures

The primary difference between options and futures is that options give the holder the
right to buy or sell the underlying asset at expiration, while the holder of a futures
contract is obligated to fulfill the terms of his/her contract.

In real life, the actual delivery rate of the underlying goods specified in futures contracts
is very low. This is a result of the fact that the hedging or speculating benefits of the
contracts can be had largely without actually holding the contract until expiry and
delivering the good(s). For example, if you were long in a futures contract, you could go
short in the same type of contract to offset your position. This serves to exit your
position, much like selling a stock in the equity markets would close a trade

What Does At The Money Mean?

An option is at-the-money if the strike price of the option equals the market price of the
underlying security.

Investopedia explains At The Money

For example, if XYZ stock is trading at 75, then the XYZ 75 option is at-the-money. You
can essentially think of this as the break-even point (when you don't take into account
transaction costs).
What Does Ask Mean?
The price a seller is willing to accept for a security, also known as the offer price. Along
with the price, the ask quote will generally also stipulate the amount of the
security willing to be sold at that price.

What Does Bid Mean?

1. An offer made by an investor, a trader or a dealer to buy a security. The bid will
stipulate both the price at which the buyer is willing to purchase the security and the
quantity to be purchased.

2. The price at which a market maker is willing to buy a security. The market maker will
also display an ask price, or the amount and price at which it is willing to sell.

What Does Call Money Mean?

Money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a
set maturity and payment schedule, call money does not have to follow a fixed schedule.
Brokerages use call money as a short-term source of funding to cover margin accounts or
the purchase of securities. The funds can be obtained quickly.

What Does Churning Mean?

1. An unethical practice employed by some brokers to increase their commissions by
excessively trading in a client's account. This practice violates the NASD Fair Practice
Rules. It is also referred to as "churn and burn", "twisting" and "overtrading".

2. A period of heavy trading with few sustained price trends and little movement in stock
market indexes.

What Does Low Volume Pullback Mean?

A technical correction toward an area of support that occurs on lower-than-average
volume. The low volume is a signal to traders that the trend is not reversing and that it is
only the weak longs looking to lock in a quick profit. Frequent moves that occur in the
opposite direction of a trend, which are accompanied by low volume, are normal
fluctuations and generally deemed to be insignificant. On the other hand, a large spike in
volume in the opposite direction of the trend could be used to signal that the smart money
is starting to look for the exits and that the trend is getting ready to reverse.

What Does Penalty Bid Mean?

A bid, or offer to purchase securities, provided by a lead underwriter or other member of
a syndicate as part of early IPO trading. The bid comes with the restrictions; if it is
used, a penalty will be assessed to the broker offering the shares back to the underwriter.
The penalty bid is created to deter investors from "flipping" IPO shares shortly after
trading begins.