How the Sensex is Calculated

Suppose the Index consists of only 2 stocks: Stock A and Stock B.

Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called 'free-floating' shares.

Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-floating.

Now suppose the current market price of stock A is Rs 120. Thus, the 'total' market capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market capitalisation is Rs 96,000 (800 x 120).

Similarly, suppose the current market price of stock B is Rs 200. The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float market cap is only Rs 200,000 (1,000 x 200).

So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).

The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60,000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 60,000 is equal to an index-value of 100.

Thus the value of the index today is = 296,000 x 100/60,000 = 493.33

This is how the Sensex is calculated.

The factor 100/60000 is called index divisor.

Source: on Rediff.com

Are We Months Away from a Realty Bust?

Toll Brothers, one of leading US homebuilders, announced it has taken a 23% dip in revenue and writedowns of $150 million in Q1 2008. However, what glares though its numbers are the signs of a flagging realty market.

Toll Brothers however, like any business trying to save face, has blamed it on ceaseless talk of recession, which it cites as the reason customers are not purchasing new homes.

According to Toll, the average price for home sales, fell to $634,000 from $730,000 last year -- a drop of 13%. This drop, it says, is mainly due to a change in the mix of houses sold as well as the value of incentives being offered.

What Toll Brothers' is saying is that US buyers are not keen on last year's splurge on plush interiors and high-end finishes, and are instead cutting back.

In so far, realty companies in the US have been maintaining the list price on documents, but are giving out freebies, discounts and other giveaways, to make up for a sizeable discount in purchase price. This is similar to a mutual fund or insurance agent giving cash from its own commissions. Builders are not keen on selling an apartment at a price today and then having to push a similar one down the road at a price 15% less next month. However, it is a trick they may not be able to hold on to for very long.

Similar gimmicks have started doing the rounds in cities like Bangalore, Hyderabad, Kochi and others, where builders are giving back incentives like cars, mobile phones, insurance, or writing off maintenance charges for the first few years or throwing in free holidays for home buyers.

All of this reeks of a simmering US-like situation in the Indian realty markets. Sure, cities like Mumbai -- for sheer lack of available space and cartelization by politician-builder nexuses, may be able to hold on for a few more months.

Yet, this is an election year, and hardly any support can be forthcoming from the government. Further, it is a matter of time before the last straw breaks the camel's back. A rush by publicly listed realty companies to meet revenue targets by March 2008, may just force them to let loose an oversupply homes in India.

Comprehensive Course on the Wave Principle

1. Fifth wave extensions, truncated fifths and ending diagonals, all imply the same thing: dramatic reversals. Well, what Prechter is saying is this : once a five-wave pattern is over, we expect a correction.
2. The singlest most rule gleaned from a study of corrective waves is that corrections are never fives. Only motive waves are fives.
   

(From Comprehensive course on the Wave Principle)