Many of us come across the term Sensex whenever we turn into a news channel or even through friends who invest regularly in stocks. Phrases like the market has crashed, Sensex went up today by 100 points, etc are commonly heard. So, what do market and Sensex mean? What do Sensex points indicate?
Here, we will unravel the mysteries of Sensex for new investors and explain in simple terms how Sensex is calculated.
What is Sensex ?
For novice investors, the term Sensex stands for Stock Exchange Sensitive Index. It is the combined value of stocks of 30 selected companies that are listed on the Bombay stock exchange (BSE). These stocks are the most actively traded stocks, along with representing some of the largest corporations. BSE can revise this list of 30 stocks over time.
If Sensex is said to be going up, investors prefer buying stocks as it is a sign that the economy is growing. On the other hand, if Sensex is falling, people hold off their investment in the economy due to a lack of confidence in the economic future. Market research analysts mostly track the Sensex movements to understand the overall growth, industry-specific development, nation’s stock market trend, etc.
Explore web story on Habits to adopt to become rich
How are the 30 stocks of Sensex selected?
Some primary criteria used in selecting the 30 stocks that comprise Sensex are:
- Should be listed on BSE
- The stock has to be large or mega-cap. Large cap includes companies with market capitalisation between Rs. 7000-20,000 crores. Mega cap includes companies with a market capitalisation above Rs. 20,000 crores.
- Relatively liquid stocks are selected
- Revenue of the company should come from its core activities
- The company should have a diversified and well-balanced sector focus in parallel to the Indian equity market
List of 30 stocks comprising the BSE Sensex:
|Company Name||Weight in Sensex|
|1||Reliance Industries Ltd.||11.99%|
What is BSE?
The above details bring us to the question, what is BSE? BSE is short for the ‘Bombay Stock Exchange and is one of the popular stock exchanges in India. It was founded back in 1875 and was the first large-scale securities market in India.
BSE facilitates trading in equity, derivatives, debt instruments, mutual funds, and also currencies. It also offers other services including investor education, risk management, clearing, and settlement, etc.
BSE has been at the forefront in shaping and developing the Indian capital markets. This is primarily done by establishing a platform for raising capital. The terms BSE and Sensex are often used together and refer to the benchmark index of S&P BSE Sensex.
How Sensex is calculated ?
Earlier, the Sensex was calculated using the weighted market capitalization method. However, since September 1st, 2003, the BSE Sensex value is calculated using the Free Float Market Capitalization method. Here are the key steps involved in its calculation:
- As a first step of the free-float market capitalization method, a selection is made of 30 companies that form the index. The formula for the same is:
- FreeFloat Market Capitalization = Market Capitalization * FreeFloat Factor.
- In this calculation, the market capitalization stands for the market value of the company. It is calculated as:
- Market capitalization = Share price per share * number of shares issued by the company
- The free Float factor is the percentage representing total shares issued by a company and that is readily available to trade for the common public. This is also a representation of the total outstanding shares of a company. Shares that are issued to the promoters, the government, etc. which are not available for public trading on the market are not included in this factor.
- After determining the free-float market capitalization, the value of BSE Sensex is calculated using the below formula:
- Value of Sensex = (Total free float market capitalization/ Base market capitalization) * Base period index value.
- The base period (year) used here is 1978-79 and the base value is 100 index points.
How to trade on BSE Sensex?
For investors who wish to trade (buy or sell securities) on BSE Sensex, it is important to have a Demat and a trading account. A Demat account holds the shares in dematerialized or electronic form. It is similar to a bank account, in that the securities get debited or credited depending on the transaction.
A trading account facilitates the sale and purchase transactions of securities online. Investors must register with a registered broker or brokerage platform, as direct purchase/sale of securities from the stock exchange is not permitted. Brokers act as financial intermediaries who connect the stock exchange and the traders.
Apart from a trading and Demat account, an investor must also have a bank account and PAN card for trading on BSE Sensex.
Frequently Asked Questions
Sensex is the total value of 30 stocks of companies that are listed on the Bombay stock exchange (BSE). These stocks belong to the largest corporations in India and, therefore, represent the Indian economy’s performance.
To invest in the stock market, you must know some basics of Sensex, trading, stock investments, etc. Stock trading also requires a Demat and trading account with a registered broker.
Nifty stands for ‘National Fifty’ and Sensex is a short form of ‘Sensitive Index’. Nifty comprises 50 selected stocks from the top 50 companies, whereas Sensex comprises 30 selected stocks from the top 30 companies.
The formula for Sensex calculation is – (total free-float market capitalization/ Base market capitalization) * Base index value. The base year used is 1978-79 and the base value is 100.
New investors can explore safer investment avenues such as mutual funds, index funds, etc before starting with individual stock investment through Sensex. This is because the latter requires some amount of expertise and knowledge of stock markets.