It is quite impossible that anyone in India has not heard about the Sensex. This is a quite popular term and has a very prominent place in the country’s stock market. So much so that even Bollywood couldn’t keep itself from making a movie on this concept. If you are at all interested in trading and the stock market, you must be quite familiar with this term already. However, for the less informed, Sensex is one of the most popular market index of 30 companies which have been listed under the Bombay Stock Exchange or BSE. Anyone who wants to enter the trading world and begin their journey in trading stocks in the market either individually or through a business needs to be familiar with the term sensex. Hence, to understand what sensex actually stands for and how it helps traders, let us have a look at the basic concept behind this market index and see how it is calculated.
What is Sensex?
The term Sensex which was introduced by Deepak Mohoni is the combination of two terms—sensitive and index. It measures the stock prices of the 30 companies that are listed under the Bombay Stock Exchange or BSE, which is the oldest stock exchange in the country. The Sensex figures are reached by calculating the fluctuations in the share prices of the 30 listed companies on a minute-by-minute basis. When the share prices of the companies rise, you can see the increase in the market capitalisation of the shares, whereas when the share prices fall, there is a decrease in the market capitalisation of the Bombay Stock Exchange or BSE, which in turn causes abatement of the Sensex.
How is Sensex calculated?
Now that we know the basic concept behind sensex and how useful it is to the traders and businesses, let us discuss another important topic related to the market index—how do you calculate sensex? As for any market index there are certain methods used when it comes to the calculation of sensex. The sensex share composition is modified by the Bombay Stock Exchange or BSE from time to time in order to make sure that it reflects current conditions of the stock market.
When discussing the ways in which Sensex is calculated, following points are important to note:
- The base year for the calculation of Sensex is always considered to be 1978-79 and the base value is always considered to be 100 basis points.
- In the beginning, when the index was newly launched, it was calculated based on the weighted methodology of market capitalisation.
- It was in the year 2003 that this calculation method was reformed and now a free-float capitalisation method is used for the calculation of the Sensex.
- The free-float capitalisation method is an alternative to the market capitalisation method, wherein as opposed to the latter, the former does not use the company’s outstanding shares for calculations. Instead, the shares available for sale under the company are used while calculating the Sensex.
- The free-float capitalisation method also excludes restricted stocks.
- To calculate free-float capitalisation, the company’s market capitalisation which is calculated by multiplying its outstanding shares with the share price, is multiplied by its free-float factor. The free float factor is the ratio of floated shares to outstanding shares. *This can be better expressed in a formula below:
Free-float capitalisation = Company’s market capitalisation ✕ Free-float factor,
Where, the company’s market capitalisation = company’s outstanding shares ✕ share price
- The free-float capitalisation method implies that the index level always demonstrates free-float value of the 30 companies that are listed under Sensex, relative to a base period.
The Fluctuations in the performance of Sensex
Over the years, there have been some major fluctuations in the performance of the sensex and that has had effects on the Indian stock market. The main reasons for the fluctuation in the Sensex’s performance are the announcement of investor friendly policies by the company, announcement of investor friendly policies by the government, natural or manmade disasters and many more.
The change in the world economy has also affected the performance of Sensex. In 2008 and 2009, due to the fall in the Dow Jones industrial average in its intraday trading led to a stock market crash and caused a major crisis in the world economy. This also had its effects on the Indian stock market and on January 21st 2008, the Indian Stock market faced a loss of 1408 points. The next day the index went into a downward spiral and trading was stopped for a day.
In the year 2008, the market closed at the lowest price in the past 10 years due to the continued drop in the index which made the entire stock market uncertain of its future. This drop continued in the year 2009 when the index again dropped by 750 points due to the Satyam fraud. However, the Sensex has again recorded an all time high in the year 2021 which shows the economic growth of the country over the years.
Although there have been many fluctuations in the performance of the Sensex over the past 30 years, the market index has still managed to hold its position as the leading stock index in India.
How is Sensex different from Nifty?
Although Sensex and Nifty are both market indices, they are fairly different from each other in many aspects. Nifty is an index of the National Stock Exchange of India or NSE whereas Sensex is an index of the Bombay Stock Exchange or BSE. The Nifty gives price movements of top 50 funds that are listed on the exchange, which is unlike Sensex which is for the top 30 companies that are listed on the Bombay Stock Exchange or BSE.
Another significant difference between the market indices when talking about the National Stock Exchange of India or NSE and the Bombay Stock Exchange or BSE is that the NSE has electronic trading incorporated from the beginning of its establishment whereas the BSE had to switch from paper trading to electronic trading.
