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.
How is Sensex Calculated?
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.
Check: Real-Time value of Sensex today
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.
How To Invest In Sensex?
Investing directly in the Sensex index is not possible. Instead, you can invest in Sensex index funds, which are essentially mutual funds that have the same group of stocks as that of the index. The primary aim of the Sensex index fund is to replicate the performance of the index. Here’s an overview of how you can invest in these funds.
- Step 1: First, open a demat and trading account with a stockbroker. In addition to these two accounts, you also need to have a bank account.
- Step 2: Once they are opened, log into your trading account using your user credentials.
- Step 3: Navigate to the mutual fund section of the trading portal.
- Step 4: Browse through the list of Sensex index funds and choose the one that you want to invest in.
- Step 5: Enter all the relevant details such as the amount, mode and frequency of investment.
- Step 6: Submit the details to place the request.
That’s it. The amount you specified will be withdrawn from your trading account and invested in the Sensex index fund of your choice.
Major Milestones of Sensex
Over the years, Sensex has crossed several key milestones. Let’s quickly go through some of the major milestones in the history of the index.
|July 25, 1990
|The Sensex crossed the 1,000-point mark for the first time, just 4 years after its launch in 1986.
|January 15, 1992
|The Sensex crossed the 2,000-point mark for the first time, just 2 years after it touched the 1,000-point mark.
|April 29, 1992
|The Sensex crashed severely by 12.77% owing to the Harshad Mehta stock market scandal.
|The Sensex touched the 5,000-point mark for the first time in its history
|January 02, 2004
|The Sensex touched 6,026.59 points due to the Information Technology boom in India.
|The Sensex touched 20,000 points for the first time due to aggressive stock market investments by both domestic and foreign investors.
|The value of Sensex crossed that of the Hang Seng index and became Asia’s highest-value index.
|May 23, 2018
|The Sensex crossed the 40,000-point mark for the first time in its history.
|January 21, 2021
|The Sensex breached the 50,000-point mark after recovering from the COVID-19-induced stock market crash.
|December 14, 2023
|The Sensex crossed the 70,000-point mark for the first time in its history.
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.
What is Sensex in simple words?
The S&P BSE Sensex, also known as Sensex, is a stock market index that represents a group of fundamentally strong and well-established companies listed on the Bombay Stock Exchange (BSE).
How does the Sensex work?
The Sensex is a stock market index that’s composed of 30 well-established and fundamentally strong companies from various sectors listed on the BSE. The index has a value that’s calculated by dividing the current market capitalisation of all of its stocks by the market capitalisation of all of its stocks as of the base year, which is then multiplied by the base index value. If a majority of the stocks in the Sensex index rise, the value of the index increases and vice versa.
Why is Sensex used?
The Sensex is used widely by investors, fund managers and other market participants to gauge the performance of the overall Indian stock market. The index also provides insights into the market sentiment and economic health of the country. Furthermore, Asset Management Companies (AMCs) often use the index as a benchmark for their mutual funds.
Why does the Sensex fluctuate?
The value of the Sensex index is based on the market capitalisation of its constituents. Changes in the stock prices of its constituents are likely to cause fluctuations in the index’s value. Some of the factors that cause the value of the Sensex to fluctuate include market sentiment, corporate earnings, economic health, interest rates and political developments.