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What is Sensex
Sensex is the benchmark index of the BSE in India. It was launched on January 1, 1986 as a basket of 30 stocks representing the country's largest, financially-sound companies listed on the BSE.
The term ‘Sensex’ is a blend of words ‘Sensitive’ and ‘Index’ and was coined by stock market expert Deepak Mohini. The Sensex reflects the movements in the Indian stock market. It is considered the benchmark index of the Indian stock market. It is the oldest index in India and provides time series data from 1979, BSE, which was previously known as Bombay Stock Exchange, says on its website.
The bellwether index reflects the sentiment of the market and serves as a benchmark for fund managers to compare the performance of their funds. For investors, Sensex acts as a proxy for the Indian stock markets.
In simpler terms, If the Sensex value increases it means that there is a general increase in the prices of shares. On the other hand, if the value of Sensex declines, it means that there is a general decrease in share prices.
Since sensex comprises companies from all key sectors of the economy, it truly reflects the sentiment of the stock market in India.
How is the Sensex calculated?
Sensex, which is also referred to as BSE 30, was calculated based on the market capitalisation or “Full Market Capitalisation” when it was launched but shifted to a "Free-float Market Capitalisation" methodology from September 1, 2003. This method is used by all major index providers including MSCI and FTSE.
Free-float is that proportion of total shares issued by the company that is readily available for trading to the general public. It does not take into account promoters’ holding, government holding, and other shares that will not be available in the market for trading in the ordinary course of events.
Free-Float Market Capitalisation = Market Capitalisation x Free Float Factor
To give an example, let’s assume that Firm A has 100 shares. Out of these 100, 70 are available to the general public and 30 are owned by the government. This means that 70 are ‘free-floating' shares and thus the free float factor will be 70%.
‘Market capitalisation’ is the valuation of the company. It can be determined by multiplying the price of a share with the number of shares issued.
To calculate Sensex:
- The market capitalisations of all 30 companies in the index are determined.
- The Free Float market capitalisation of all 30 companies is calculated.
- Free Float market capitalisations of all the firms are added to get a total.
- Formula of Sensex is applied; Sensex = (total free float market capitalisation/ base market capitalisation) * Base index value.
- The base year to calculate Sensex is 1978-79 and the base value is static but it has to be changed. According to BSE, Rs. 2501.24 crore is to be used as the base market capitalisation.
- The base index value is 100.
So, Sensex = free float market capitalisation of 30 firms /25041.24 crores*100
So, How are these 30 companies selected?
The BSE's criteria for selecting these companies is as followed:
BSE-listed stock: The stock should have a listing history of at least one year on BSE to be considered.
Market Capitalisation: The company should be in the Top 100 companies listed by full market capitalisation.
Trading frequency: The Security should have been traded on each and every trading day for the last one year, BSE says. Exceptions to this can be made in case of extreme reasons.
Average Daily Trades and Average Daily Turnover: The Security should be in the Top 150 firms listed by average number of trades per day and by average value of shares traded per day for the last one year.
Track Record: In the opinion of the Index Committee, the firm should have an acceptable track record, BSE says on its website.
The Index Committee meets every quarter to review all the BSE indices including SENSEX. However, every review meeting may or may not lead to a change in the constituents.
How is Sensex different from Nifty?
Nifty is the benchmark index of the National Stock Exchange. ‘National Fifty’ make up Nifty.
The major difference between Sensex and Nifty is the number of constituents they have.
While Nifty 50 constitutes of the top 50 companies that are actively traded in NSE, Sensex comprises the top 30 companies actively traded in BSE.
Sensex is more niche and on the other hand, Nifty is broader as it has 50 firms.