What is Sensex? Meaning, How It Works & Calculation

What is Sensex?

23 Sept 2024
By: BlinkX Research Team

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.	Since its inception, the Sensex first crossed 1000 points on July 25, 1990, and closed at 1001 points. In 1991, the new economic reforms kicked in which enabled the Sensex to cross the 2000-point mark for the first time in 1992. Later that year, it again took a severe beating due to heavy selling after the Harshad Mehta scam. By 1999, the index crossed the 5000-point mark in preparation for the new century.
Beginning of the 21st Century to mid-2000s.	The Sensex saw a new boom at the beginning of the 21st century, an IT-driven market boom, which saw the index breach 6006 points. This record held for four years, till January 2, 2004, when it crossed 6026.59 points. In the year 2005, the Sensex crossed 7000 points for the first time following an amicable settlement in the Ambani family feud which saw huge gains by the Reliance Group of companies. The index then raced from June to December 2005, breaching 9000 points on the back of heavy buying by foreign institutional investors and different domestic funds.
Mid-2000s to its end.	The benchmark Sensex touched an all-time high of 10,003 points briefly during the morning session on February 7, 2006. The Sensex significantly grew between 2006 and 2007 owing to heavy buying by funds, touching 20,000 points in December 2007 from 10,000. The market witnessed highs and lows from 2008 to 2010, following which the aftermath of the stock market crash showed a gradual recovery. Sensex closed 21,004.96 points on November 5, 2010, after crossing 21,000.
2013-2015	In October 2013, the Sensex crossed yet another new peak and closed at 21,033.97 points. By 2014, the Sensex moved past the Hang Seng Index and became Asia's highest-valued stock market index. It also saw an incredible 7,000-point surge in one year alone from 21,000 points to 28,000 points, going way ahead of the previous record of a leap of 600 points recorded in 2007. Starting on 23 January 2015, the Sensex reached a new high with 29,278 points. Within two months, after the repo rate cuts by RBI, the index crossed 30,000 points for the first time ever.
2017-2019	During the year 2017-18, the Sensex steadily grew and breached the 38,000-point mark. It breached the 40,000-mark level for the first time on May 23, 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.

FAQs of What is Sensex

This has been used as a benchmark to define the performance of the Indian stock market in general, which reflects the economic health and trend.

The Sensex always measures the market sentiment and then reflects the economic condition of the country. It can be thought of as a mutual fund containing 30 different companies in its make-up, each with different weights. Since the stock prices of these companies change every minute and second, it directly affects the Sensex. When the stock prices of a majority of them go up, the Sensex automatically starts rising, and vice-versa, when their prices start falling, the Sensex falls.

You cannot directly buy shares of Sensex but may only invest through mutual funds or ETFs tracking the Sensex index.

The Sensex moves according to changes in stock prices of constituent companies due to market conditions, economic factors, and investor sentiments.

The Sensex contains 30 stocks to represent the companies spread across different market sectors of the Indian economy. It offers a fair view of the performance of the market that can be gained from this.

Which is better, Sensex or Nifty, depends on the investment goals and preferences of the particular investor. Nifty consists of a broad number of companies that provide broader representation, while Sensex represents a small number of reputed companies. Nifty can be said to be more diversified because of the larger number of constituents.

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