What is Sensex?

The Sensex is the stock market index of the Bombay Stock Exchange (BSE) in India. It includes 30 of the largest and most traded stocks on the BSE, and it is used to measure the overall performance of India's economy. Let us understand what is Sensex in detail below.

Brief Definition of Sensex

The Sensex is based on the market value of the companies and is adjusted for the number of shares available for trading. The index is reviewed twice a year, once in June and again in December. It was launched on 1^st January 1986. Analysts and investors use the Sensex to track the country's economic trends and the performance of different industries.

The BSE Sensex was created by analyst Deepak Mohanti. It is the oldest stock market index in India, started in 1986, and tracks 30 of the largest and most traded companies on the Bombay Stock Exchange (BSE). Sometimes it is also called the BSE 30.

To be included in the index, a company must meet the below criteria:

• It must be listed on the Bombay Stock Exchange.
• It should be a large or mega-cap company.
• It must have enough trading activity (liquidity).
• It should help represent a balanced view of India’s stock market sectors.

The company must generate and earn revenue from its business activities.

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Importance of BSE Sensex in the Indian Stock Market

The BSE Sensex is very important for investors in India. It is the main index used to measure how well the Indian stock market is doing. The Sensex helps investors understand market trends, and mood, and find potential investment opportunities. By keeping an eye on its movements, investors can assess the market's health, make smarter decisions, and manage their investments better.

The BSE Sensex is a trusted guide that shows how the top and most active stocks are performing. It’s a useful tool for anyone looking to invest in India’s stock market.

History of Sensex

The Bombay Stock Exchange (BSE), the first stock exchange in Asia, was established in 1875. It was also the first in India to be officially recognized under the Securities Contract Regulation Act in 1956. 

One of the most notable events in BSE's history happened on April 18, 1992, when the BSE Sensex, a key stock market index, fell by 12.7%. This drop followed the discovery of a scam where a broker had illegally moved money from public banks into stocks to artificially increase their value. Despite this controversy, the Sensex saw significant growth after 1991 when India opened its economy to the world.

For instance, before COVID-19, the Sensex grew from 5,000 in the early 2000s to over 42,000 by January 2020. This growth was driven not only by India's growing economy but also by the rise of the middle class, which increased consumer demand.

However, in recent years, India's economic growth has slowed down. In 2019, the country experienced its lowest growth in a decade, and the global COVID-19 pandemic further slowed the economy, affecting future growth and market conditions.

How is Sensex Calculated?

When Sensex was first introduced, it was calculated using a method where the market value of each company was based on the total number of its shares. But over time, the calculation switched to a method called free-float capitalization. Instead of considering all the company's shares, this method only looks at the shares that are available for public trading.

In simple terms, the index now reflects the value of the 30 companies in the Sensex based on the shares that are traded, compared to a reference point in the past.

The formula to calculate Sensex is: 

Free Float Market Capitalization = Market Capitalization x Free Float Factor

Let's say Firm A has 100 shares in total. Out of these, 70 shares are available for the public to buy, and 30 shares are owned by the government. This means 70 shares are "free-floating," and the free-float percentage is 70%.

The company's value is based on its market capitalization, which is found by multiplying the share price by the total number of shares.

This factor is the ratio of shares available for trading to the total shares of a company. Using the free-float capitalization method, the index shows the value of the 30 companies listed on the Sensex, based on the free-floating shares, compared to a starting period.

How to Invest in Sensex?

Before starting your investment in the Sensex, it is essential to follow these key steps:

Open a Demat Account

A Demat account is necessary to hold your shares in electronic form. This account will securely store the shares you purchase. 

Open a Trading Account

Once you open a Demat account, the next step is to open a trading account. Since the Bombay Stock Exchange (BSE) does not facilitate direct purchase or sale of securities, a trading account allows you to buy and sell securities online with ease.

Ensure You Have a Bank Account

In addition to the Demat and trading accounts, a valid bank account is required to facilitate the transfer of funds for your transactions. A PAN card is also mandatory for trading on the Sensex.

By following these steps, you will be well-prepared to begin investing in the Sensex.

How are 30 Companies Selected in Sensex?

To understand what the Sensex means, it's important to know how the 30 stocks are chosen. The Bombay Stock Exchange (BSE) selects these stocks based on five main factors:

• The company must be listed on the BSE.
• It should have a large market value, either a mega-cap (over ₹20,000 crore) or a large-cap (₹7,000-₹20,000 crore).
• The company should be easy to trade, meaning its shares are bought and sold frequently.
• The company's main business activities should bring in most of its revenue.
• The company should play an important role in its sector, helping the sector grow in line with the overall market.

It is important to note that the 30 companies in the Sensex are not permanent. BSE updates the list based on these factors.

How Does Sensex Impact Investors?

The Sensex, or the Bombay Stock Exchange Sensitive Index, is a stock market index in India that tracks the performance of 30 of the largest and most actively traded companies. Here's how it impacts investors:

Market Sentiment Indicator: The Sensex gives an overall sense of how the stock market is performing. A rising Sensex often signals positive market sentiment, while a falling Sensex can indicate negative sentiment.

Investment Decisions: Investors use the Sensex to make decisions about buying or selling stocks. If the Sensex is rising, it might encourage people to invest more, while a decline might make investors more cautious.

Portfolio Performance: If an investor’s portfolio is made up of stocks in the companies listed in the Sensex, the movements of the Sensex directly affect the value of their portfolio.

Market Trends: The Sensex reflects the health of the economy. A strong Sensex may indicate economic growth, which can encourage investors to invest, while a weak Sensex can signal economic challenges.

Risk Management: A volatile Sensex can signal increased market risk. Investors might adjust their strategies to reduce risk, such as diversifying their investments.

Benchmark for Returns: Many investors compare their investment returns to the Sensex to see if they are outperforming the market or not. If an investor’s returns are better than the Sensex, it’s seen as a success.

Global Impact: Since the Sensex is closely watched by international investors, its movements can affect foreign investment in India. A rising Sensex can attract foreign investors, leading to more capital inflow into the market

Factors Influencing Sensex

The Sensex is a stock market index that represents the performance of 30 major companies listed on the BSE. Several factors can influence the Sensex such as:

1. Economic Performance

Strong economic growth boosts investor confidence, leading to higher stock prices and a rise in the Sensex. A weak economy, inflation, or recession can cause the Sensex to fall.

2. Interest Rates

When the Reserve Bank of India (RBI) raises interest rates, borrowing becomes expensive, leading to lower investments and a fall in the Sensex. Lower interest rates make borrowing cheaper and encourage investment, pushing the Sensex up.

3. Corporate Earnings

Strong earnings reports from the companies in the Sensex index generally lead to a rise in the Sensex. Weak earnings or losses can result in a decrease in the Sensex.

4. Foreign Investment

High levels of foreign investment in Indian stocks tend to increase demand for shares, driving the Sensex up. If foreign investors pull out money, the Sensex may drop.

5. Global Market Trends

Movements in global markets, especially from major economies like the US, can influence the Sensex. Negative news or a downturn in global markets can cause the Sensex to fall.

6. Political Stability

A stable government creates investor confidence, leading to a positive impact on the Sensex. Political uncertainty, corruption scandals, or elections can cause volatility.

7. Commodity Prices

Changes in the prices of key commodities (like oil, gold, etc.) impact certain sectors in the Sensex. For example, rising oil prices can hurt sectors like airlines and shipping, affecting the Sensex negatively.

8. Inflation

High inflation reduces the purchasing power of consumers and can affect corporate profits, causing the Sensex to drop. Low inflation is generally seen as a positive factor for the Sensex.

9. Currency Exchange Rates

A strong rupee can boost the Sensex as it makes imports cheaper and increases profits for companies with foreign sales. A weak rupee can have the opposite effect, making imports costly and hurting corporate profits.

10. Market Sentiment and Speculation

Investor emotions, news, or rumors can cause short-term fluctuations in the Sensex, even if the underlying fundamentals have not changed much.

11. Government Policies

Economic reforms, tax changes, and government spending can influence the performance of companies and, by extension, the Sensex.

12. Natural Disasters or Pandemics

Events like natural disasters, the COVID-19 pandemic, or other crises can negatively impact the Sensex due to uncertainty and disrupted economic activity.

Milestones of Sensex India

The Sensex has marked several key milestones since its inception, reflecting the growth and resilience of the Indian stock market:

1986: The Sensex was first created and made public.

1990: It crossed the 1,000-point mark.

2006: It reached 10,000 points for the first time.

2007: The index surpassed the 20,000-point threshold.

2015: It touched the 30,000-point level for the first time.

2019: The Sensex reached a new record by crossing 40,000 points.

2021: In the aftermath of the COVID-19 pandemic, the Sensex surpassed the 50,000-point mark, and later in the same year, it soared past 60,000 points, signaling robust growth and investor confidence.

2023: The index achieved another significant milestone by breaching the 70,000-point mark.

2024: In a record-breaking feat, the Sensex crossed 80,000 points, marking an exceptional pace of growth.

These milestones underscore the dynamic evolution of the Sensex and the growing confidence in India’s financial markets.

Major Plunges in Sensex Stocks

The Sensex has seen major drops over the years due to market changes and economic issues:

• In 1992, the Harshad Mehta scam caused a big decline.
• In 2008, the global financial crisis led to the Sensex falling by more than 50%.
• In 2011, the European debt crisis and a downgrade of the US credit rating caused another big drop.
• In 2020, the COVID-19 pandemic led to one of the sharpest declines in Sensex history.

Despite these drops, the Sensex has usually recovered and performed well over time.

Significant Drops in Sensex

• Between 2008 and 2009, a stock market crash and a drop in intraday trading of the Dow Jones Industrial Average caused a major global economic crisis. 
• The stock market in India was also badly affected by this crisis, with its biggest point loss ever on 21^st January 2008, when it dropped 1,408 points. As a result, trading was paused for an hour the next day.
• The Sensex continued to fall from January to November 2008, which worried investors. It hit its lowest point in 10 years in October 2008, closing at 8,509.56 points.
• In 2009, the Satyam fraud caused the Sensex to drop by around 750 points, which upset the market further.
• In 2020, when the lockdown was announced due to the pandemic, the Sensex fell from around 41,000 points in February to 27,500 points in April.

You may also like to read:

Stock Market Crash History

Why Stock Market is Down Today

Conclusion
To buy and sell stocks on the BSE and NSE, you need to refer to indices like Sensex and Nifty. These indices track the performance of stocks based on factors such as industry, company size, and more. The Sensex Index helps you understand investor sentiment, choose stocks more easily, and make passive trading simpler. The "Sensex Today" value shows the current value of the Sensex index on any given day, and it can change constantly.