The Sensex is an Index that denotes the Indian Stock market. It denotes the overall value of the BSE (Bombay Stock Exchange). Sensex was formed in the year 1986. It comprises 30 individual stocks of different sectors having different weights. The weightage of stocks is calculated by a Free Float Market Capitalisation method and is revised periodically to change to weightage or an individual stock.
Sensex-
Sensex is the combination of the top 30 stocks from different sectors from the BSE (Bombay Stock Exchange) that denotes the overall value of the Indian Stock Market.
Sensex is a parameter that is used by people to see how the Indian Markets are performing and valued. The name SENSEX is named on a Stock Market Analyst Mr. Deepak Mohoni. Like Nifty that denotes the NSE (National Stock Exchange), Sensex denotes the BSE (Bombay Stock Exchange) that is the oldest Stock Exchange of India established in the year 1875.
The value of Sensex increases or decreases with the change in the underlying stocks. If the underlying Stocks move up in value then the Sensex value increases and vice-versa.
How is Sensex Calculated-
The Sensex is calculated by the following steps-
- The 30 stocks that make up the Sensex is selected on the basis of some pre-determined criteria.
- The market capitalization of the 30 is calculated individually based on the Free Float Market Cap method. (This is a method in which the Total Market Cap of a particular Stock is calculated by multiplying the current stock price with the outstanding number of shares in the market excluding the shares that are held by the promoter or the government). For Example, if a company “X” has 1,000 outstanding shares present in the market which sums to 81% of the total float, hence the category would be taken as 85%, and the price of 1 share is Rs 5, then the total Free Float Market capitalization would be- 1,000 x 5 x 85%= 4250.
- The total Free Float Market Capitalization of the 30 chosen companies is Summed up to get the Total of all the Free Float Cap of the Index.
- Now that the total Free Float is calculated the value of the Index is calculated by this formula- Total Free float market capitalization/ Base market Capitalization. (The base year to calculate Sensex is 1978-79, and the base value of Sensex is static. The current base Index value is 100. According to BSE, this value has to change and 2501 Cr rupees have to be used as the base value. But as of now, 100 is being used.
The composition of the Sensex is reviewed and altered regularly. This is done to ensure that the companies present in the Sensex fulfill all the necessary criteria of the Index.
Some criteria for the Sensex-
- The Stock should be a Large-cap stock
- The stock should have high volumes of trading activity in it and should be highly Liquid.
- It should generate regular revenue from its core business model.
As a stock fulfills the above criteria it is considered as an eligible stock for the Sensex and the top 30 stocks are chosen that constitute the Sensex.
Conclusion- To conclude the Sensex is a measure to value the BSE (Bombay Stock Exchange). A total of 30 top companies are chosen out of the 5000 companies that are listed on the BSE that determine the SENSEX. The weightage of the stocks is calculated by the Free Float Market Capitalization Method.