The Sensex stands as a fundamental metric, commanding attention from investors and analysts alike. Serving as a vital indicator of market performance, the Sensex, formally known as the S&P BSE Sensex, embodies a sophisticated mechanism for evaluating the vitality and direction of the Indian stock market.
What is Sensex?
Sensex, short for 'Stock Exchange Sensitive Index,' represents the Bombay Stock Exchange's stock market performance. Sensex, or the S&P BSE Sensex, is the benchmark stock market index of India. It shows how well the 30 biggest and most traded stocks on the Bombay Stock Exchange (BSE) are doing. People often use it as a way to measure how the Indian stock market is performing.
How does the Sensex work?
The Sensex plays a crucial role in reflecting the movements of the Indian stock market and serves as an indicator of the overall health of the economy. Let is delve into the details:
1. Composition:
- The Sensex comprises 30 of the largest and most actively traded stocks listed on the BSE.
- These 30 stocks are carefully selected to represent various sectors of the Indian economy.
2. Calculation:
- The Sensex is calculated using a method called free-float capitalisation.
- In this method, companies are weighted based on their share of the total market capitalisation of the index.
- Larger companies have a greater impact on the index due to their higher market capitalisation.
- The calculation involves dividing the free-float market capitalisation of the 30 companies by a number called the index divisor.
- The index divisor ensures that the Sensex remains comparable over time, even when there are changes in the constituent stocks due to corporate actions or replacements.
3. Significance:
- The Sensex is considered a barometer of investor sentiment and economic trends.
- When the Sensex rises, it indicates that the prices of the underlying 30 stocks have increased, reflecting optimism in the market.
- Conversely, a decline in the Sensex suggests that the prices of these stocks have fallen, signalling caution or pessimism.
Additional read: What is Option Chain
How is Sensex calculated?
The Sensex is calculated by taking the sum of the closing prices of the top 30 stocks in the index, multiplied by their respective weights. The weights are based on the free-float market capitalisation of each stock, dividing this value by the Base market capitalisation, multiplying it by the base value of the index
The formula for Sensex:
| Sensex = Free float market capitalisation of 30 companies / Base market capitalisation * Base value of the index. |
For Sensex calculation, the base year to calculate Sensex is 1978-79 and the base value is static, Rs. 2501.24 crore is to be used as the base market capitalisation and a value is 100 is taken as base value
So, the final formula for calculation Sensex is:
Sensex = Free float Market Capitalisation of 30 firms / 25041.24 crores * 100 |
Free-float market capitalisation is the total market capitalisation of a company's shares that are available to the public for trading.
Let’s try to understand with an example, let's say that the Sensex is made up of 3 stocks, with the following weights:
- Stock A: 25%
- Stock B: 25%
- Stock C: 50%
If the closing prices of the stocks on the day of calculation are Rs. 100, Rs. 200, and Rs. 300, respectively, then the free float market capitalisation would be calculated as follows:
Free Float Market Capitalisation = (25 * 100) + (25 * 200) + (50 * 300)
= 2500 + 5000 + 15000
= 22500
In this particulate case
| Sensex will be = Free float market capitalisation of these 3 companies / Base market capitalisation * Base values of the index. |
| Sensex = 22500 / 25041.24 crores * 100 |
The Sensex value is calculated at the end of each trading day. The index is also updated intraday, but the intraday changes are not considered for the calculation of the Sensex value at the end of the day.
In simple terms, the Sensex is a measure of the overall performance of the 30 largest and most liquid stocks on the Bombay Stock Exchange (BSE). The higher the Sensex value, the better the performance of the Indian stock market.
How do Sensex constituents get decided?
Only the top companies make it into the Sensex. A strict selection process ensures this, with companies needing to meet five key requirements:
- Listed on the BSE: This is the first hurdle. Only companies listed on the Bombay Stock Exchange are even considered.
- Big and bold: The Sensex is for the major players. Companies need to have a large or mid-size market capitalisation to qualify.
- Easy to trade: Smooth and active trading is essential. Stocks must be highly liquid, meaning they can be bought and sold readily.
- Strong core business: The Sensex favours companies with a solid foundation. They should generate significant revenue from their core activities.
- Keeping it balanced: The Sensex aims to reflect the Indian economy. Each industry sector has a weight, and companies are chosen to maintain that balance.
How to invest in Sensex?
Investing in the Sensex involves investing in the underlying stocks that constitute the index. This can be achieved through various means:
- Direct Investment: Investors can buy shares of the individual companies listed in the Sensex through a trading account, using a trusted broker like Bajaj Financial Securities Limited (BFSL).
- Exchange-Traded Funds (ETFs): ETFs that track the Sensex provide an indirect way to invest in the index. These funds aim to replicate the performance of the index and offer diversification across multiple stocks.
- Index Funds: Similar to ETFs, index funds passively track the Sensex's performance by holding the same stocks in the same proportions as the index.
Advantages of SENSEX
With its wide reach and popularity, let us look at a few advantages of Sensex, which are mentioned below:
- If a company is listed on Sensex, it will benefit from greater visibility. Moreover, it would also enhance the business’s reputation..
- Being listed on BSE Sensex is a matter of pride, as the index comprises high-performing companie.
- It helps businesses and entrepreneurs raise share capital.
- It offers opportunities for companies to grow, including expansions, mergers, and acquisitions.
- It also offers benefits like improving worker efficiency in risk distribution and providing incentives.
Milestones of Sensex
The Sensex has witnessed several significant milestones in its history, reflecting the evolution of India's economy and financial markets:
| Milestone | Date |
| Launch of Sensex with a base value of 100 | January 2, 1986 |
| Crossing the 5,000 mark | 01/10/99 |
| Crossing the 20,000 mark | 2007 |
| Crossing the 21,000 mark | 2008 |
| Notable crashes: 1992 Harshad Mehta scam, 2008 financial crisis, COVID-19 pandemic | Various |
| Current all-time high | Present |
Major plunges in the Sensex stocks
With the meaning and advantages of Sensex clarified, let us also discuss some of the major plunges in the index historically. These are:
| Date | Cause | Impact | Points Lost |
| January 21, 2008 | Market reacts to global financial crisis, records highest single-day loss | Loss of 1408 points, highest since inception | 1408 points |
| January 22, 2008 | Continued market uncertainty, trading suspended for an hour | Trading halt to mitigate further losses | - |
| 01/10/08 | Intensification of global financial crisis | Sensex hits 10-year low, closing at 8509.56 points | - |
| 2009 | Satyam fraud scandal shakes investor confidence | Loss of nearly 750 points | 750 points |
What are the factors affecting Sensex?
There is a wide range of factors that can affect the Sensex. For the convenience of readers, they have been classified into three classes: macroeconomic, industry-specific, and country-specific. Let us take a look at these factors in more detail:
Macroeconomic factors
Macroeconomic factors, such as interest rates, inflation, and foreign exchange rates, can significantly impact the Sensex. Interest rate changes directly impact the cost at which a company can secure financing and market sentiment. Additionally, a high inflation situation can cause the input costs to rise, reducing the company’s profitability. In addition to all these, fluctuations in foreign exchange rates also influence company earnings from exports and imports. All these factors can cause changes in the Sensex price level.
Industry-specific factors
These factors include regulatory changes, technological advancements, and mergers and acquisitions, which can significantly impact the index. Technological advancements affect competitiveness and growth, especially in the telecom and IT sectors. Moreover, regulatory changes, such as changes in environmental norms, can also impact company operations and profitability. Mergers and acquisitions bring about a change in the business and financial performance.
Company-specific factors
Company-specific factors like management changes, financial performance, and market share can influence the Sensex. Financial metrics such as revenue, earnings, and profit margins also affect stock prices, impacting the Sensex. Management changes, like a new CEO, can completely throw off a company's strategic direction and performance, affecting stock prices. Additionally, shifts in market share and competition within industries influence earnings and growth prospects.
Difference between Nifty and Sensex
Nifty and Sensex are two of the most well-known stock market indices in India, often used as barometers to gauge the overall performance of the Indian stock market. However, there are some key differences between the two:
| Sensex | Nifty | |
| Composition | The Sensex is composed of 30 of the largest and most actively traded companies listed on the Bombay Stock Exchange (BSE). It represents a diverse range of sectors. | The Nifty, officially known as the Nifty 50, comprises 50 of the largest and most liquid stocks listed on the National Stock Exchange (NSE). It also covers various sectors of the economy. |
| Stock Exchange | It is associated with the Bombay Stock Exchange (BSE), which is one of the oldest stock exchanges in Asia. | It is associated with the National Stock Exchange (NSE), a relatively newer exchange known for its electronic trading platform. |
| Number of Companies | It consists of 30 companies, making it a narrower index in terms of the number of constituents. | It includes 50 companies, which provides a broader representation of the market. |
| Sector Representation | Due to its smaller number of constituents, the Sensex may not cover as wide a range of sectors as the Nifty. | With more companies, the Nifty offers a broader sectoral representation, potentially capturing a more comprehensive view of the market. |
| Impact of Large Companies | Since it has fewer companies, the performance of a few large companies can have a significant impact on the overall movement of the index. | The larger number of constituents in the Nifty may distribute the influence of individual companies more evenly. |
Conclusion
The Sensex is more than just a numerical representation of stock prices; it reflects India's economic landscape and investor sentiment. As an essential benchmark, it provides insights into the performance of India's top companies across various sectors. Investors use Sensex to gauge market trends, make informed investment decisions, and monitor economic health. The index's journey through various milestones underscores the dynamism of India's financial markets and the broader economy, making it a critical tool for investors seeking exposure to India's growth story.
