Personal Finance

What is Sensex?5 min read

February 14, 2021 4 min read

What is Sensex?5 min read

Reading Time: 4 minutes

We are sure, you find that adrenaline rush happening in your system when you hear the word Sensex. But do you know how it all started and the journey that revolves already this particular term?

Don’t worry, we are here to take you step by step throughout the journey and everything that you need to learn about Sensex.

As a newbie investor, you will be bombarded with this word for a duration of every few minutes, and would work wonders for you if you understand this key concept.

To start off with, did you know that SENSEX is an acronym for Sensitive Index. It was started in the year of 1978–79 with a base point of 100. The term Sensex was coined by Deepak Mohoni, a stock market analyst in 1989

There are two major stock exchanges in India. Each stock exchange has a major index constituted by them with representation from major sectors of the economy reflecting the cross-section of the economy.

The index is expected to reflect the economy and the movement of the index, and its ups and downs speak about the health of the economy.

Sensex is the BSE Ltd index. Nifty is the National Stock Exchange index.

The Sensex basically is an indicator of all the major companies listed on BSE which is located in Mumbai. The Nifty on the other hand is an indicator of all the major companies listed on the NSE (National Stock Exchange).

Sensex is an index comprising of the top 30 stocks, among some 5000 stocks listed on the BSE. It is assumed that these 30 stocks replicate the market.

These 30 stocks are taken from 23 different industries operating in the Indian economy, based on parameters defined by the Exchange and managing the index. These parameters include:
– Liquidity, Market Capitalization, Floating Stock, etc.

Some Important Points to Note

  •  30 companies on the index are selected on the basis of free-float market capitalization. Free float market capitalization basically includes those shares that do not have any lock-in period and are freely available for trading.
  •  During market hours, prices of the index scripts are used by the trading system to calculate Sensex every 15 seconds and disseminated in real-time.
  •  If Sensex moves up, it means that the prices of most of the stocks on the index have moved higher. This is representative of a similar trend on the BSE. Alternatively, if Sensex moves down, it implies the majority of the index companies have not performed well on that particular trading day.

How is Sensex calculated

Sensex is calculated taking into consideration the stock prices of 30 different companies listed on BSE. It is calculated by using the “free-float market capitalization” method. This is one of the best methods for calculating a stock market index.

In the earlier years, Sensex would be calculated using the weighted market capitalization method. However, from September 1st, 2003 onwards the free-float market capitalization method is being used.

The top 30 companies that are taken into consideration are changed from time to time. This is done to make Sensex an accurate index.

Formula to calculate Sensex

Value of Sensex = (Total free float market capitalization/ Base market capitalization) * Base period index value.

The base period (year) for Sensex calculation is 1978-79. The base value index is 100. Using the above formula, one can calculate the value of BSE Sensex.

Role of 30 companies in regards to Sensex

Sensex is designed to reflect overall market sentiment and comprises 30 stocks that play a vital role. These are large, well-established, and financially sound companies from the main sectors.

The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”.

This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members, and other participants in the financial markets. The committee follows a list of certain criteria while doing so.

The list of companies that form SENSEX

1 Housing Development Finance Corporation Ltd.
2 Cipla Ltd.
3 Bharat Heavy Electricals Ltd.
4 State Bank Of India Ltd.
5 HDFC Bank Ltd.
6 Hero Motocorp Ltd.
7 Infosys Ltd.
8 Oil and Natural Gas Corporation Ltd.
9 Reliance Industries Ltd.
10 Tata Power Ltd.
11 Hindalco Industries Ltd.
12 Tata Steel Ltd.
13 Larsen & Toubro Ltd.
14 Mahindra & Mahindra Ltd.
15 Tata Motors Ltd.
16 Hindustan Unilever Ltd.
17 ITC Ltd.
18 Vedanta Ltd.
19 Wipro Ltd.
20 Sun Pharmaceutical Ltd.
21 GAIL Ltd.
22 ICICI Bank Ltd.
23 Jindal Steel & Power Ltd.
24 Bharti Airtel Ltd.
25 Maruti Suzuki Ltd.
26 Tata Consultancy Services Ltd.
27 NTPC Ltd.
28 DLF Ltd.
29 Bajaj Auto Ltd.
30 Coal India Ltd.

Role of SEBI

To conduct inspection, inquiries & audits of stock exchanges, intermediaries, and self-regulating organizations and to take suitable remedial measures wherever necessary. This function is undertaken for the orderly working of stock exchanges and intermediaries.

Some Major Milestones

On July 25, 1990, SENSEX touched the four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results.

SENSEX crossed the 5,000 mark on October 11 1999as the Bharatiya Janata Party-led coalition won a majority in the 13th Lok Sabha election.

The BSE benchmark index on February 6 2006 touched 10,003 points during mid-session. The SENSEX finally closed above the 10,000 mark on 7 February 2006.

The SENSEX on October 20, 2006, crossed the 13,000 mark for the first time. It took 135 days to reach 13,000 from 12,000, and 124 days to reach 13,000 from 12,500.

On October 29, 2007, the SENSEX crossed the 20,000 mark for the first time with a massive 734.5-point gain but closed below the 20,000 mark. The SENSEX would close above the 20,000 mark for the first time on 11 December 2007. It took 42 days after reaching the 19,000 milestone to close above 20,000 points for the first time.

The SENSEX closed at 25,019.51, for its first close above the 25,000 mark.

It took Sensex 35 years to hit the 50,000 mark since its launch. And, in all this time, stock market investors have amassed a wealth of nearly Rs 200 lakh crore.

Conclusion

The Sensex is managed and operated by a joint venture between BSE and S&P Dow Jones Indices, a global index manager. The composition of the Sensex is recast or modified from time to time to represent the true composition of the market.