What is Sensex, and how is it calculated?
Introduction
What is Sensex and how is it calculated? The stock market is a crucial component of any economy, and the Sensex serves as a benchmark index that reflects the overall performance of the Indian stock market. The Sensex, or the Sensitive Index, is the most widely tracked equity index of the Bombay Stock Exchange (BSE), which is one of the oldest stock exchanges in Asia. It helps investors and analysts gauge market trends and economic conditions.
This article provides an in-depth understanding of what the Sensex is, how it functions, and how it is calculated.
What is Sensex?
Sensex, also known as the BSE SENSEX, is the stock market index of the Bombay Stock Exchange (BSE). It comprises 30 well-established and financially sound companies listed on the BSE. These companies are selected from various sectors based on specific criteria, ensuring that the index represents a diverse mix of industries.
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Importance of Sensex- What is Sensex and how is it calculated?
- Market Indicator: Sensex acts as a barometer for the Indian stock market, indicating its overall performance.
- Investor Confidence: A rising Sensex suggests economic growth and stability, attracting more investors.
- Economic Health: Since the index includes top companies from different industries, its performance reflects the broader economic condition.
- Benchmarking: Investors use the Sensex as a benchmark to compare the performance of their investments.
- Global Recognition: It is widely followed by international investors who wish to invest in the Indian stock market.
History of Sensex- What is Sensex and how is it calculated?
SENSEX was introduced in 1986 as the first equity index in India. It started with a base value of 100, and over the decades, it has witnessed several highs and lows, reflecting India’s economic journey. Today, it serves as a crucial market indicator and is widely tracked by domestic and international investors.
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How is Sensex Calculated?
The Sensex is calculated using the free-float market capitalization-weighted method. Initially, it was calculated using the market capitalization-weighted method, but in 2003, BSE shifted to the free-float methodology for better accuracy and efficiency.
Step-by-Step Calculation of Sensex
- Selection of 30 Companies
- Companies are chosen based on market capitalization, liquidity, trading frequency, sector representation, and financial performance.
- Market Capitalization Calculation
- Market capitalization is determined by multiplying a company’s total outstanding shares by its current market price:Market Capitalization = Total Shares Outstanding × Current Market Price
- Free-Float Market Capitalization
- Not all shares of a company are available for trading in the market. Some shares are held by promoters, government entities, or institutions, and these are not freely traded.
- The free-float market capitalization considers only the shares available for public trading:Free-Float Market Capitalization = Market Capitalization × Free-Float Factor
- The free-float factor is a percentage representing the shares available for trading.
- Index Value Calculation
- The Sensex value is derived using a base year and base index value. The formula used is:Sensex = (Total Free-Float Market Capitalization of 30 Companies / Base Market Capitalization) × Base Index Value
- The base year for Sensex is 1978-79, and the base value is set at 100.
Example of Sensex Calculation- What is Sensex and how is it calculated?
Let’s assume:
- The total free-float market capitalization of the 30 Sensex companies is ₹100 trillion.
- The base market capitalization (from the base year 1978-79) is ₹250 billion.
- The base index value is 100.
Using the formula:
Sensex = (100 trillion / 250 billion) × 100 Sensex = (100,000 billion / 250 billion) × 100 Sensex = 400 × 100 = 40,000
Thus, the Sensex value would be 40,000.
Factors Affecting Sensex Movements
Several factors influence the rise and fall of the Sensex:
- Economic Indicators: GDP growth, inflation rates, and interest rates significantly impact market movements.
- Corporate Earnings: Strong earnings reports from the 30 listed companies boost Sensex performance.
- Global Markets: The performance of international stock markets, like the Dow Jones or NASDAQ, can influence investor sentiment.
- Government Policies: Changes in taxation, monetary policies, and economic reforms affect stock prices.
- Foreign Institutional Investments (FII): Large inflows or outflows by foreign investors impact market trends.
- Geopolitical Events: Wars, trade policies, and global economic conditions play a role in market fluctuations.
- Market Sentiment: Investor psychology, speculation, and confidence also drive Sensex movements.
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Difference Between Sensex and Nifty
| Feature | Sensex | Nifty |
|---|---|---|
| Stock Exchange | Bombay Stock Exchange (BSE) | National Stock Exchange (NSE) |
| Number of Stocks | 30 | 50 |
| Calculation Method | Free-float market capitalization | Free-float market capitalization |
| Base Year | 1978-79 | 1995 |
| Base Value | 100 | 1000 |
| Ticker Symbol | BSE Sensex | Nifty 50 |
Conclusion- What is Sensex and how is it calculated?
The Sensex is a crucial indicator of the Indian stock market’s performance. It provides investors with insights into the economic environment and market trends. Calculated using the free-float market capitalization method, the Sensex ensures an accurate representation of the top 30 companies in India. Understanding how it is calculated helps investors make informed financial decisions and analyze market movements effectively.