What is Sensex?
- 23 Sept 2024
- By: BlinkX Research Team
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The Sensex, also known as the BSE '30', refers to the stock market index for the Bombay Stock Exchange, which was the oldest in India. It started working as early as 1875. It mirrors the changes in the performance of 30 large-sized companies belonging to various sectors from nearly 6,000 companies listed on the BSE. It is the most popular index for Indian stock market time series analysis and is also traded on many international platforms like EUREX and in BRICS countries like Brazil, Russia, China, and South Africa. Read on to learn more about what is Sensex meaning, detail the steps involved in calculating it, discuss why Sensex is advantageous for investors, and guide you through the process of investing in it.
How is Sensex Calculated?
The Sensex is calculated by aggregating the weighted average values of the top 30 stocks in the index, each weighted per its free-float market capitalization. This is done by using the following formula:
Sensex = Free Float Market Capitalisation of 30 Companies / Base Market Capitalisation × Base Value of the Index
For the Sensex, the base year is 1978-79, while the base value is 100. The base market capitalization used in the calculation is ₹25,041.24 crore. So, the final formula to calculate the Sensex is:
Sensex = Float Market Capitalisation of 30 Companies / 25,041.24 × 100
Free-float market capitalization is defined as the market value or size of a company based on its tradable shares.
Here is a small example. Let us assume a Sensex consists of 3 stocks with the following weights:
- Stock X: 30%
- Stock Y: 20%
- Stock Z: 50%
The closing prices for each stock are ₹150, ₹250, and ₹350 respectively. Then free-float market capitalization is calculated as shown below.
Free Float Market Capitalisation = (30×150)+(20×250)+(50×350) =4500+5000+17500= 4500 + 5000 + 17500=4500+5000+17500 =27000= 27000=27000
Hence, in this case, the Sensex value would be:
Sensex = 27,000 / 25,041.24 Crore ×100
The value of Sensex gets updated on the closure of every trading day and also changes throughout the day. However, the intraday changes do not affect the final Sensex value at the end of the day.
In other words, Sensex reflects the performance of the 30 largest and most actively traded stocks on the BSE. The higher value of the Sensex infers better performance by the Indian stock market.
Table of Content
- How is Sensex Calculated?
- How to Invest in Sensex?
- Advantages of Sensex
- Milestones of Sensex India
How to Invest in Sensex?
Before investing in the stock market one should be aware of what is Sensex and Nifty are. They are the two major indices in India. One should understand how they work and also what is the difference between Sensex and Nifty. Essentially, investment in these exchanges or just Sensex is nothing but investing in the constituents of the index. There are a few ways of doing this:
- Direct investment: Direct investment means investment in shares of individual companies constituting the Sensex. It is made possible through a trading account opened with a good broker.
- Exchange-Traded Funds: These investment funds track the returns of the Sensex. In other words, when you invest in an ETF, indirectly you are investing in all companies constituting the Sensex. The object of an ETF is to replicate the return of an index. They enable one to invest in a portfolio of stocks through a single purchase.
- Index Funds: This is similar to ETFs, but with the only difference that they are mutual funds that follow the Sensex. This fund is invested in the same stocks as the Sensex, in a proportion exactly similar to it, to mimic its performance.
Advantages of Sensex
Following are some of the advantages of being on the Sensex list:
- Raising Finances: For that matter, a company can raise capital by making more share issuances for its Sensex listing.
- Incentivization: It will also cover risk management and provide incentivization accordingly.
- Opportunities for Growth: The membership of Sensex can give opportunities for expansion, merger, and acquisition.
- Matter of Pride: Since Sensex is a platform to track the best-performing companies, getting selected in it is a matter of pride and prestige.
- Higher Attention: Due to being listed in Sensex, companies get more attention and can enhance their reputation.
Milestones of Sensex India
Now that you know what is Sensex, let’s look at how it has performed over the years. The table below illustrates the gradual rise (and fall) of Sensex throughout India’s stock market history.
Timeline | Events |
Early 90s to the end of the 20th century. |
|
Beginning of the 21st Century to mid-2000s. |
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Mid-2000s to its end. |
|
2013-2015 |
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2017-2019 |
|
Conclusion
The Sensex, which is one of the two major indices of the Bombay Stock Exchange, was established in 1875. This represents the performance of 30 leading Indian companies and reflects the health of the stock market. It has grown from 1,000 points in 1990 to over 40,000 by 2019. Its calculation is based on free-float market capitalization. Thus, Sensex offers a wide array of investment avenues: direct investments, ETFs, and index funds. A company, therefore, stakes a claim in the Sensex and is given much visibility; its chances of growth increase on this basis. If you are into tracking such investments, you may want to try an investment stock market app for constant updates on how Sensex is performing.