Sensex

In India, Sensex is the benchmark index of the BSE. It was introduced on January 1, 1986 as a basket of 30 equities that represented the country’s largest and most financially healthy corporations listed on the BSE.

Deepak Mohini, a specialist in the stock market, invented the term Sensex by combining the phrases ‘Sensitive’ and ‘Index’ Sensex mirrors the fluctuations of the Indian stock exchange. It is the benchmark index for the Indian stock exchange. It is the oldest index in India and provides time-series data beginning in 1979, according to BSE, formerly known as the Bombay Stock Exchange, on its website.

The bellwether index reflects market mood and acts as a standard against which fund managers may measure the performance of their products. Sensex serves as a proxy for the Indian stock markets for investors.

Simply put, a rise in the Sensex signifies a rise in share prices across the board. In contrast, a reduction in the value of the Sensex indicates a broad decline in share prices.

Since the sensex includes firms from all major economic sectors, it accurately represents the sentiment of the Indian stock market.

The history of the BSE Sensex

The greatest decline for the BSE Sensex occurred on April 18, 1992, when it plummeted 12.7%. This decline was followed by a fraud in which a broker in the stock market unlawfully moved cash from a public sector bank to market stocks in order to increase their value.

After the government opened its economy to the rest of the globe in 1991, the BSE Sensex surged and grew despite this stock market dispute.

Prior to COVID-19, the Sensex chart in January 2020 rose to 42,000, an increase of around 5,000 from the beginning of the 21st century. This contributing growth is responsible for India’s developing economy, the expansion of which is pushed by the middle class since they significantly contribute to the nation’s consumer wants.

Purposes of Sensex

The development of the country’s economy has altered the prior method of calculating the Sensex. The calculating technique changed to the free-float capitalization approach. Despite the modification in the Sensex Index’s calculating mechanism, the goals have not altered to date.

  • The firms should be included in the index of the Bombay Stock Exchange (BSE) in India.
  • These elements ought to be either huge or megacap companies.
  • These firms’ stocks should be relatively liquid.
  • These firms must produce money from their main activity.
  • The sector should be in equilibrium with the Indian equity market.

How can one invest in the SENSEX?

As can be seen, the SENSEX is comprised of the leading corporations in India, and if you purchase the SENSEX, you become a part-owner of these incredible enterprises. You now have two options for investing in the SENSEX.

  • Invest directly in proportion to the SENSEX’s weightage.

You can begin investing directly in the components of the SENSEX and their respective weightings in this index. This implies that you can immediately purchase the number of shares according to the stock’s weightage.

  • Invest in Mutual Index Funds

The best way to invest in the SENSEX would be through index mutual funds. These funds have a portfolio that is identical to that of the index. Consequently, a SENSEX index fund will consist of the 30 companies in the same proportion as the SENSEX.

How is the Sensex calculated?

Sensex is computed using the stock values of 30 diverse BSE-listed firms. Utilizing the “free-float market capitalisation” approach, it is computed. This is one of the better approaches for calculating an index of the stock market.

Sensex was determined using the weighted market capitalization approach in prior years. Since September 1, 2003, the free-float market capitalization approach has been utilized.

The top 30 firms that are taken into account are periodically altered. This is done to ensure the accuracy of the Sensex index.

Formula to calculate Sensex

Sensex value = (Total free float market capitalization/Base market capitalization) * index value for the base period.

1978-79 is the basis period (year) for Sensex calculations. The index’s base value is 100. Using the following technique, the value of the BSE Sensex may be determined.

Function of 30 firms in relation to the Sensex

Sensex is supposed to represent market mood as a whole and consists of 30 stocks that play a significant role. These corporations are substantial, well-established, and financially solid representatives of the major industries.

The 30 firms that comprise the Sensex are chosen and periodically evaluated by a “index committee.”

This “index committee” consists of academics, mutual fund managers, finance journalists, independent governing board members, and other financial market participants. While doing so, the committee follows a list of specific criteria.

The list of firms that comprise SENSEX

1 Housing Development Finance Corporation Ltd.

2 Cipla Ltd.

3 Bharat Heavy Electricals Ltd.

4 State Bank Of India Ltd.

5 HDFC Bank Ltd.

6 Hero Motocorp Ltd.

7 Infosys Ltd.

8 Oil and Natural Gas Corporation Ltd.

9 Reliance Industries Ltd.

10 Tata Power Ltd.

11 Hindalco Industries Ltd.

12 Tata Steel Ltd.

13 Larsen & Toubro Ltd.

14 Mahindra & Mahindra Ltd.

15 Tata Motors Ltd.

16 Hindustan Unilever Ltd.

17 ITC Ltd.

18 Vedanta Ltd.

19 Wipro Ltd.

20 Sun Pharmaceutical Ltd.

21 GAIL Ltd.

22 ICICI Bank Ltd.

23 Jindal Steel & Power Ltd.

24 Bharti Airtel Ltd.

25 Maruti Suzuki Ltd.

26 Tata Consultancy Services Ltd.

27 NTPC Ltd.

28 DLF Ltd.

29 Bajaj Auto Ltd.

30 Coal India Ltd.

So, how are these 30 businesses chosen?

The BSE selected these firms based on the following criteria:

  • BSE-listed stock: To be considered, the stock must have a listing history of at least one year on the BSE.
  • Market Capitalization: The company’s market capitalization should be among the top 100 corporations by total market capitalization.
  • The security should have been traded on each and every trading day during the past year, according to the BSE. There may be exceptions to this rule in cases of exceptional necessity.
  • Average Daily Trades and Average Daily Turnover: The security should be ranked among the top 150 companies based on the average number of trades per day and the average value of shares traded per day over the last twelve months.

According to the BSE website, the business must have an acceptable track record in the eyes of the Index Committee.

Quarterly, the Index Committee reviews all BSE indexes, including the SENSEX. However, every review meeting may or may not result in constituent changes.

How to invest in the BSE Sensex

  • To trade (buy or sell shares) on the BSE, a demat and trading account are required. A demat account stores shares in a dematerialized or electronic format. In addition, a demat account functions similarly to a bank account, where securities are debited or credited depending on the transaction. A demat account may be opened with a Depository Participant (DP) who is either registered with Central Securities Depositories Limited (CSDL) or National Securities Depository Limited (NSDL) or both.
  • A trading account enables the online selling and purchase of securities. As one cannot buy shares directly from the stock exchange, the following step is to register with a broker or brokerage platform. Stockbrokers are financial middlemen that connect the stock market and the trader.
  • In addition to trading and demat accounts, BSE trading requires a bank account and PAN card.
  • Numerous firms provide both trading and demat accounts. Investors can utilize their services to trade on the NSE, BSE, or both exchanges.

How do SENSEX constituents get decided?

Every stock is added to the SENSEX only after adequate due diligence, ensuring that only high-quality stocks are featured. In reality, the following five criteria must be met in order for a company to be evaluated for admission to the SENSEX.

  • Must be listed on Bombay Stock Exchange (BSE) – The firm must be listed on the Bombay Stock Exchange; otherwise, it cannot be included in the SENSEX.
  • Should be huge or moderate in size. Corporate – To be eligible for inclusion in the SENSEX, a company’s market capitalisation must be big to medium. Due to these criteria, this ranking includes only the finest and largest organizations.
  • The liquidity of stocks must be strong. To be considered for inclusion in the SENSEX, a stock must be liquid. This indicates that it should be simple to acquire and sell this stock. Given that this liquidity is somewhat dependent on the quality of the underlying firm, it also serves as a screening criterion.
  • Substantial Core activities should be the source of revenue – The company’s primary business activity should generate a large amount of money. There are several organizations that have been divided into various sectors based on their fundamental operations, depending on the nature of their business. Bharti Airtel is a telecom firm, whereas Sun Pharma is a pharmaceutical company.
  • Sector Weight of the business– Sector balance is an additional crucial criterion. For each given index, every sector is assigned a weight that reflects the economy. For example, the financial services sector has the highest weighting in NIFTY and other indices. Therefore, it is vital for each firm, regardless of whether it is currently part of the SENSEX or has been added to the list, to preserve the sector’s balance to which it belongs.
  • Currently, each component of the SENSEX has a separate weighting. This weighting is determined by the market capitalisation of free-floating stocks.

How is Sensex different from Nifty?

The Nifty index is the benchmark for the National Stock Exchange. National Fifty constitute Nifty.

The primary distinction between Sensex and Nifty is the quantity of its members.

While Nifty 50 covers the top 50 actively traded firms on the NSE, Sensex comprises the top 30 actively traded companies on the BSE.

Sensex is a more specialized index than Nifty, which includes 50 companies.

Conclusion

A joint venture between BSE and S&P Dow Jones Indices, a worldwide index manager, manages and operates the Sensei. Periodically, the composition of the Sensex is recast or updated to reflect the genuine nature of the market.

FAQS

1.Ques: Which is superior, the Nifty or the Sensex?

Ans: Both the Nifty and Sensex Indices are used by stock market professionals to gauge the overall performance trend of the stock market. The sole distinction is that Sensex consists of 30 firms while Nifty consists of 50 companies. Nifty is more significant numerically than Sensex due to the vast number of active stock marketers, strong liquidity, and aggressive buying and selling, although Sensex has been performing better overall.

2.Ques: What are Nifty and Sensex in their most basic forms?

Ans: Nifty and Sensex are benchmark index values for gauging the stock market’s overall performance. The National Stock Exchange uses the Nifty Index, whilst the Bombay Stock Exchange uses the Sensex Index.

3.Ques: What is the primary distinction between the Sensex and the Nifty?

Ans: The primary distinction between Sensex and Nifty is the amount of firms included in the sample. Sensex evaluates 30 businesses for sample, while Nifty evaluates 50.

4.Ques: Which is older, the Sensex or the Nifty?

Ans: Sensex is older than Nifty and has been beating Nifty despite the fact that Nifty has more firms.

5.Ques: How has the Sensex fared over the past several decades?

Ans: Since its introduction, the BSE Sensex has been on a roller coaster. From the time of its inception, it took the Sensex about 35 years to achieve the milestone of 50,000 points.

6.Ques: How many stocks comprise the BSE Sensex?

Ans: There are 30 stocks that comprise the BSE Sensex