SENSEX, also known as the S&P BSE SENSEX, is the benchmark stock market index of the Bombay Stock Exchange (BSE) in India. It stands for “Sensitive Index” and is often considered the barometer of the Indian equity market’s overall performance.
Key points about SENSEX:
- Composition:
SENSEX comprises a basket of 30 large, well-established, and financially sound companies representing various sectors listed on the BSE. These companies are considered leaders in their respective industries.
- Calculation Methodology:
The index is calculated using a free-float market capitalization-weighted methodology. It takes into account the market capitalization (market value of a company’s outstanding shares) of its constituent companies, adjusting for the proportion of shares available for public trading (free float).
- Weightage:
Companies included in the SENSEX have different weightages based on their market capitalization. Larger companies with higher market capitalization have a more significant impact on the index’s movements.
- Base Year and Base Value:
The SENSEX was first compiled on January 1, 1986, with a base value of 100. The base year for the index is 1978-79.
- Benchmark Index:
SENSEX serves as a benchmark to gauge the overall performance of the Indian stock market. Movements in the SENSEX are closely watched by investors, market analysts, and policymakers to assess the market sentiment and trends.
- Representation:
While the SENSEX comprises 30 companies, it is a representation of a broader market performance and economic health, rather than a comprehensive representation of the entire stock market due to its limited number of constituents.
- Global Recognition:
SENSEX has gained recognition globally as a key indicator of the Indian equity market’s performance. Its movements are often reported by financial news outlets and serve as a reference point for investors worldwide interested in Indian markets.
Overall, the SENSEX is a significant index in the Indian stock market landscape, reflecting the collective performance of a select group of large-cap companies and influencing investment strategies and decisions. It’s used as a yardstick to measure the market’s performance and as a benchmark for various financial products and investment portfolios.
How is Sensex Calculated?
The calculation of the SENSEX, the benchmark index of the Bombay Stock Exchange (BSE) in India, involves a relatively straightforward methodology. Here’s an overview of how SENSEX is calculated:
- Selection of Constituent Stocks:
SENSEX comprises 30 stocks selected from different sectors that are among the largest and most actively traded stocks on the BSE.
- Market Capitalization Weighted:
The index is calculated using the free-float market capitalization-weighted methodology. Market capitalization is the total market value of a company’s outstanding shares. Free-float market capitalization takes into account only the shares available for public trading, excluding promoter-held, locked-in, or strategic holding shares.
- Calculation Formula:
The formula to calculate the SENSEX is:
SENSEX = (Sum of the Free-Float Market Capitalization of each constituent) / Divisor
- The Divisor:
The divisor is a constant number used to maintain continuity in the index value when changes occur, such as stock splits, bonuses, rights issuances, or changes in the index constituents. It is adjusted periodically to account for corporate actions that may affect the index’s value.
- Steps in Calculation:
a. Calculate Market Capitalization: Find the free-float market capitalization of each constituent stock by multiplying the stock’s price by the number of shares available for trading.
b. Calculate Total Market Capitalization: Add the free-float market capitalizations of all 30 constituent stocks to obtain the total market capitalization of the SENSEX.
c. Calculate Index Value: Divide the total market capitalization by the index divisor to derive the SENSEX value.
- Weightage of Constituents:
The weightage of individual stocks in the SENSEX is determined by their market capitalization. Stocks with higher market capitalization have a more significant impact on the index’s movements.
- Base Year and Base Value:
The base year for the SENSEX is 1978-79, and the base value of the index was set at 100 on April 1, 1979.
- Rebalancing and Review:
The composition of the SENSEX is periodically reviewed and updated based on certain criteria, such as liquidity, market capitalization, and sector representation. Rebalancing ensures the index accurately represents the current market scenario.
The SENSEX calculation methodology provides a snapshot of the overall market performance based on the movement of the selected 30 stocks, serving as a benchmark for market trends and investor sentiment in India’s equity markets.
How To Invest In Sensex?
Investing in the SENSEX, which is an index representing a basket of 30 large-cap stocks on the Bombay Stock Exchange (BSE), cannot be done directly as it is an index rather than a tradable asset. However, investors can gain exposure to the SENSEX or track its performance through various investment methods:
- Exchange-Traded Funds (ETFs):
Invest in ETFs that aim to replicate the performance of the SENSEX. These ETFs are listed and traded on the stock exchange and track the movement of the index. Investors can buy and sell ETF units through brokerage accounts similar to stocks.
- Index Funds:
Invest in index mutual funds or index-linked schemes offered by mutual fund companies. These funds are designed to mimic the performance of the SENSEX by investing in the same stocks that constitute the index.
- Portfolio Management Services (PMS):
Some portfolio management services or discretionary portfolio managers may offer strategies that mirror the SENSEX’s performance. Investors can allocate funds to such PMS services managed by professionals.
- Structured Products:
Some financial institutions create structured products, such as certificates or notes, linked to the performance of the SENSEX. These products allow investors to gain exposure to the index’s performance.
- Derivative Instruments:
Futures and options contracts linked to the SENSEX are traded on the derivatives segment of the BSE. Investors with knowledge of derivatives trading can use these instruments to speculate on or hedge against the SENSEX’s movement.
- Investment in SENSEX Constituents:
Investors can individually invest in the stocks that constitute the SENSEX. However, this method requires selecting and purchasing shares of each of the 30 constituent companies separately.
When considering investing in instruments linked to the SENSEX, it’s essential to conduct thorough research, assess risk tolerance, and consider investment goals. Additionally, investors should choose suitable investment vehicles that align with their investment strategies and seek advice from financial professionals if necessary.
Milestones of Sensex India
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“The historical trajectory of India’s Sensex stock market index exemplifies a compelling narrative of highs and lows over the past three decades. Starting in the early 1990s, the index closed at 1001 in July 1990, swiftly reaching 2000 in 1992. The turn of the 21st century saw a significant surge, largely propelled by the IT sector, pushing the index to a noteworthy 6006 points. By 2004, it marked a marginal increase to 6026.59 points. Subsequently, landmark events, such as the Ambani family settlement, boosted the index to cross 7000 points. Between June and December 2005, rapid growth ensued, breaching the 9000-point mark due to substantial foreign institutional and domestic fund investments.
The momentum continued in the mid-2000s when the index, during a mid-session in February 2006, touched a high of 10,003 points. Aggressive fund purchases catalyzed a staggering jump from 10,000 to 20,000 points by December 2007. However, the market encountered fluctuations, including a crash and subsequent recovery between 2008 and 2010, eventually crossing 21,000 points in November 2010.
The years between 2013 and 2015 witnessed remarkable milestones. In 2014, the Sensex outperformed the Hang Seng Index, becoming Asia’s highest-valued stock market index. It surged from 21,000 points to 28,000 points within the year, surpassing the previous 600-point record set in 2007. By January 23, 2015, the index soared to 29,278 points, reaching a new pinnacle. Additionally, repo rate cuts by the RBI contributed to the index breaching the 30,000-point threshold.
Continuing into the late 2010s, from 2017 to 2018, the index displayed steady growth, surpassing the 38,000-point mark. Despite enduring bullish and bearish trends, India’s stock market has exhibited an overall positive trajectory for investors, characterized by a consistent and upward trajectory of the Sensex.”
Major Plunges in Sensex Stocks
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“Between 2008 and 2009, the global economy encountered a profound crisis marked by a substantial decline in the Dow Jones industrial average during intraday trading, triggering a widespread stock market crash. This crisis reverberated through India’s stock market, inflicting a significant blow with a staggering loss of 1408 points on January 21, 2008, marking its most substantial dip since its inception. The ensuing day witnessed a downward spiral, prompting a suspension of trading for an hour.
From January to November 2008, the index sustained a consistent decline, plunging the entire market into a state of unpredictability. By October 2008, the market closed at 8509.56 points, registering its lowest performance in the past decade.
The downturn persisted into 2009, compounded by the Satyam fraud, causing the index to plummet by nearly 750 points. This fraudulent incident threw the market into a state of turmoil, exacerbating the ongoing economic instability.”