Annualised traded value

An index is only useful if investors can actually buy and sell its constituent stocks without moving the price too much. So before a stock earns a place in an index, its trading activity gets tested.

Annualised traded value is that test. It looks at how much of the stock changed hands, day after day, over the past six months, and turns that into a single yearly number. Stocks that fail the test — because too little of them trades — are dropped from the eligible list, however good they otherwise look on size or growth.

The S&P BSE index methodology (used for the BSE Sensex family) computes it this way: take the daily traded value of a stock each trading day, find the median for each month, then take the median of those six monthly medians over the six-month reference period. That six-month median is then annualised using 250 trading days in a year.

In the Sensex construction steps, all companies meeting the eligibility factors (listing history, 100% trading days) are first ranked twice — once by free-float market cap, once by total market cap — and the top 75 from each list are combined. That combined list is then sorted by annualised traded value, and companies whose cumulative annualised traded value exceeds 98% are excluded — i.e., the least liquid tail of the list is cut before the free-float weighting and sector rules are applied.

Illustrative figures, following the workbook's own method. A stock's daily traded value over a sample month runs between Rs 8 crore and Rs 22 crore, with a monthly median of Rs 14 crore. Across the six-month reference period, the six monthly medians are Rs 12, 14, 13, 15, 16 and 11 crore.

Median of those six values = Rs 13.5 crore (average of the middle two, Rs 13 crore and Rs 14 crore).

Annualised traded value = Rs 13.5 crore × 250 trading days = Rs 3,375 crore.

If the combined eligible list is then sorted by this figure from highest to lowest, and this stock's cumulative rank places it beyond the 98% cumulative traded value cut-off — because a long tail of much more heavily traded large-caps already accounts for 98% of total traded value before this stock is reached — it is excluded from the index, regardless of its market capitalisation rank.

Chapter 12 (Introduction to Indices), in the S&P BSE Sensex construction methodology, defines annualised traded value and uses the 98% cumulative cut-off as one of the index-construction filters, alongside the free-float weight floor of 0.5%. Expect a question on how the figure is computed (median of monthly medians, annualised on 250 days) or on what the 98% rule does.

• It is a median of medians, not a simple average. Using a mean instead of the median changes the answer and is the most common computational slip.
• 250 trading days, not 365 calendar days, is the annualisation factor the workbook uses.
• The reference period is six months, matching the same six-month window used for the listing-history and trading-frequency eligibility checks.
• The 98% cut-off removes the least-traded tail, not the most-traded stocks — a candidate who reads "greater than 98% excluded" backwards will get this wrong.
• This is an eligibility and exclusion filter, not a weighting method — constituent weights are still set by free-float market capitalisation, calculated separately.