Most people are likely to be familiar with the word ‘Sensex’ with respect to domestic stock markets in India, but some may not be able to provide an appropriate answer when faced with the question of ‘What is Sensex?’ The acronym BSE Sensex, meaning ‘Bombay Stock Exchange Sensitive Index’- a term coined by analyst Deepak Mohanti, is generally viewed as the benchmark of the Bombay Stock Exchange and is the oldest stock market index in the country, initially compiled in 1986. It includes 30 of the largest and most frequently traded companies on the Bombay Stock Exchange with the base year of 1978-79 taken for its calculations. It is also sometimes referred to as the BSE 30. The index’s composition is reviewed biannually, in June and December.
If a company is included as part of the index, it satisfies the following criteria:
- It must be listed under the Bombay Stock Exchange in India.
- It must primarily consist of large or mega-cap stocks.
- It must be relatively liquid.
- Companies must contribute in keeping the sector balanced with the country’s equity market.
- Earnings must be generated from coactivities.
The value of the index at any point in time indicates the free-float market value of the 30 stocks it is constituted by with respect to a base period. The index was originally calculated by means of the full market capitalization method up till 2003. The market capitalization of a company is calculated by multiplying its stock price by the total number of shares issued by them. This method included all of the company’s outstanding shares, including restricted shares such as those issued to insiders within an organization that could not be readily bought or sold.
The index is now calculated by means of the free float capitalization method in response to the query of ‘What is Sensex calculation based upon?’ This is a methodology followed by most of the world’s major indices such as the S&P, Dow Jones, MSCI, STOXX, and FTSE. The newer free-float method excludes these and only makes use of the shares that are readily available for trading. This method makes use of a value referred to as the free float factor, which is the ratio of the floated shares issued by a company with respect to its total outstanding share. Multiplying this value by the market capitalization, gives you the company’s free float capitalization which can be regarded as a means of measuring the company’s influence on the index.
A value referred to as the index divisor ensures that it is comparable at different points in time and serves the purpose of adjusting for occurrences such as scrip replacement or corporate actions. The Sensex is updated in real-time, every 15 seconds during market hours by using the prices of index scrips based on the latest trades that have taken place. At closing, its end value for the day is determined by utilising the weighted average of all trades on its constituents taking place within the last 15 minutes. If no trades have taken place on one or more of its constituents in the last 15 minutes or over the course of the entire day, the price on the last trade or the price at closing on the previous day are taken respectively.
If a company included in the index issues right shares, the free float capitalization is adjusted with a proportional offset made to its market cap. In the event of the issue of bonus shares, adjustments are made to the number of shares taken in the calculator with no alterations made to the market capitalization. Adjustments to base market capitalization are made in the event of conversion of debentures, mergers, spin-offs, equity reduction due to buyback of shares, corporate restructuring, etc.
Adjustments to the value of the base year aid in ensuring that actions such as issuing of capital, rights issues, and other corporate announcements as well as the replacement of its constituent stocks do not have any bearing upon the Sensex meaning and historical value over long durations of time.
Sensex’s value over time can be used as a gauge for market behaviour as well as for benchmarking portfolio performances, comparing investments and for analyzing Index Funds, Index Futures, or Index Options.
Analysts, Investors and Traders use it to gauge the behaviour of the Economy economy, both on a day-to-day basis as well as in terms of how it is affected by both domestic or global political and socio-economic events. As such, nervous eyes lie fixated on the fluctuations of the sensex during COVID-19, which has already resulted in the worst crash in its history on March 23rd, 2020, where it plummeted by 3,935 points.