Stock Exchange Sensitive Index (Sensex)

SENSEX stands for Stock Exchange Sensitive Index. It is the oldest stock index in India and is also known as the Bombay Stock Exchange (BSE).
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Stock Exchange Sensitive Index (Sensex)
OPEN ACCOUNT
3 mins read
17-October-2024

The Sensex stands as a fundamental metric, commanding attention from investors and analysts alike. Serving as a vital indicator of market performance, the Sensex, formally known as the S&P BSE Sensex, embodies a sophisticated mechanism for evaluating the vitality and direction of the Indian stock market.

What is Sensex?

Sensex, short for 'Stock Exchange Sensitive Index,' represents the Bombay Stock Exchange's stock market performance. Sensex, or the S&P BSE Sensex, is the benchmark stock market index of India. It shows how well the 30 biggest and most traded stocks on the Bombay Stock Exchange (BSE) are doing. People often use it as a way to measure how the Indian stock market is performing.

How does the Sensex work?

The Sensex plays a crucial role in reflecting the movements of the Indian stock market and serves as an indicator of the overall health of the economy. Let is delve into the details:

1. Composition:

  • The Sensex comprises 30 of the largest and most actively traded stocks listed on the BSE.
  • These 30 stocks are carefully selected to represent various sectors of the Indian economy.

2. Calculation:

  • The Sensex is calculated using a method called free-float capitalisation.
  • In this method, companies are weighted based on their share of the total market capitalisation of the index.
  • Larger companies have a greater impact on the index due to their higher market capitalisation.
  • The calculation involves dividing the free-float market capitalisation of the 30 companies by a number called the index divisor.
  • The index divisor ensures that the Sensex remains comparable over time, even when there are changes in the constituent stocks due to corporate actions or replacements.

3. Significance:

  • The Sensex is considered a barometer of investor sentiment and economic trends.
  • When the Sensex rises, it indicates that the prices of the underlying 30 stocks have increased, reflecting optimism in the market.
  • Conversely, a decline in the Sensex suggests that the prices of these stocks have fallen, signalling caution or pessimism.

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How is Sensex calculated?

The Sensex is calculated by taking the sum of the closing prices of the top 30 stocks in the index, multiplied by their respective weights. The weights are based on the free-float market capitalisation of each stock, dividing this value by the Base market capitalisation, multiplying it by the base value of the index

The formula for Sensex:

Sensex = Free float market capitalisation of 30 companies / Base market capitalisation * Base value of the index.


For Sensex calculation, the base year to calculate Sensex is 1978-79 and the base value is static, Rs. 2501.24 crore is to be used as the base market capitalisation and a value is 100 is taken as base value

So, the final formula for calculation Sensex is:

Sensex = Free float Market Capitalisation of 30 firms / 25041.24 crores * 100


Free-float market capitalisation is the total market capitalisation of a company's shares that are available to the public for trading.

Let’s try to understand with an example, let's say that the Sensex is made up of 3 stocks, with the following weights:

  • Stock A: 25%
  • Stock B: 25%
  • Stock C: 50%

If the closing prices of the stocks on the day of calculation are Rs. 100, Rs. 200, and Rs. 300, respectively, then the free float market capitalisation would be calculated as follows:

Free Float Market Capitalisation = (25 * 100) + (25 * 200) + (50 * 300)

= 2500 + 5000 + 15000

= 22500

In this particulate case

Sensex will be = Free float market capitalisation of these 3 companies / Base market capitalisation * Base values of the index.
Sensex = 22500 / 25041.24 crores * 100

The Sensex value is calculated at the end of each trading day. The index is also updated intraday, but the intraday changes are not considered for the calculation of the Sensex value at the end of the day.

In simple terms, the Sensex is a measure of the overall performance of the 30 largest and most liquid stocks on the Bombay Stock Exchange (BSE). The higher the Sensex value, the better the performance of the Indian stock market.

How do Sensex constituents get decided?

Only the top companies make it into the Sensex. A strict selection process ensures this, with companies needing to meet five key requirements:

  1. Listed on the BSE: This is the first hurdle. Only companies listed on the Bombay Stock Exchange are even considered.
  2. Big and bold: The Sensex is for the major players. Companies need to have a large or mid-size market capitalisation to qualify.
  3. Easy to trade: Smooth and active trading is essential. Stocks must be highly liquid, meaning they can be bought and sold readily.
  4. Strong core business: The Sensex favours companies with a solid foundation. They should generate significant revenue from their core activities.
  5. Keeping it balanced: The Sensex aims to reflect the Indian economy. Each industry sector has a weight, and companies are chosen to maintain that balance.

How to invest in Sensex?

Investing in the Sensex involves investing in the underlying stocks that constitute the index. This can be achieved through various means:

  • Direct Investment: Investors can buy shares of the individual companies listed in the Sensex through a trading account, using a trusted broker like Bajaj Financial Securities Limited (BFSL).
  • Exchange-Traded Funds (ETFs): ETFs that track the Sensex provide an indirect way to invest in the index. These funds aim to replicate the performance of the index and offer diversification across multiple stocks.
  • Index Funds: Similar to ETFs, index funds passively track the Sensex's performance by holding the same stocks in the same proportions as the index.

Advantages of SENSEX

With its wide reach and popularity, let us look at a few advantages of Sensex, which are mentioned below:

  • If a company is listed on Sensex, it will benefit from greater visibility. Moreover, it would also enhance the business’s reputation..
  • Being listed on BSE Sensex is a matter of pride, as the index comprises high-performing companie.
  • It helps businesses and entrepreneurs raise share capital.
  • It offers opportunities for companies to grow, including expansions, mergers, and acquisitions.
  • It also offers benefits like improving worker efficiency in risk distribution and providing incentives.

Milestones of Sensex

The Sensex has witnessed several significant milestones in its history, reflecting the evolution of India's economy and financial markets:

Milestone Date
Launch of Sensex with a base value of 100 January 2, 1986
Crossing the 5,000 mark 01/10/99
Crossing the 20,000 mark 2007
Crossing the 21,000 mark 2008
Notable crashes: 1992 Harshad Mehta scam, 2008 financial crisis, COVID-19 pandemic Various
Current all-time high Present


Major plunges in the Sensex stocks

With the meaning and advantages of Sensex clarified, let us also discuss some of the major plunges in the index historically. These are:

Date Cause Impact Points Lost
January 21, 2008 Market reacts to global financial crisis, records highest single-day loss Loss of 1408 points, highest since inception 1408 points
January 22, 2008 Continued market uncertainty, trading suspended for an hour Trading halt to mitigate further losses -
01/10/08 Intensification of global financial crisis Sensex hits 10-year low, closing at 8509.56 points -
2009 Satyam fraud scandal shakes investor confidence Loss of nearly 750 points 750 points


What are the factors affecting Sensex?

There is a wide range of factors that can affect the Sensex. For the convenience of readers, they have been classified into three classes: macroeconomic, industry-specific, and country-specific. Let us take a look at these factors in more detail:

Macroeconomic factors

Macroeconomic factors, such as interest rates, inflation, and foreign exchange rates, can significantly impact the Sensex. Interest rate changes directly impact the cost at which a company can secure financing and market sentiment. Additionally, a high inflation situation can cause the input costs to rise, reducing the company’s profitability. In addition to all these, fluctuations in foreign exchange rates also influence company earnings from exports and imports. All these factors can cause changes in the Sensex price level.

Industry-specific factors

These factors include regulatory changes, technological advancements, and mergers and acquisitions, which can significantly impact the index. Technological advancements affect competitiveness and growth, especially in the telecom and IT sectors. Moreover,  regulatory changes, such as changes in environmental norms, can also impact company operations and profitability. Mergers and acquisitions bring about a change in the business and financial performance.

Company-specific factors

Company-specific factors like management changes, financial performance, and market share can influence the Sensex. Financial metrics such as revenue, earnings, and profit margins also affect stock prices, impacting the Sensex. Management changes, like a new CEO, can completely throw off a company's strategic direction and performance, affecting stock prices. Additionally, shifts in market share and competition within industries influence earnings and growth prospects.

Conclusion

The Sensex is more than just a numerical representation of stock prices; it reflects India's economic landscape and investor sentiment. As an essential benchmark, it provides insights into the performance of India's top companies across various sectors. Investors use Sensex to gauge market trends, make informed investment decisions, and monitor economic health. The index's journey through various milestones underscores the dynamism of India's financial markets and the broader economy, making it a critical tool for investors seeking exposure to India's growth story.

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Frequently asked questions

What is Sensex in simple words?

Sensex, short for the Stock Exchange Sensitive Index, is India’s oldest index. It is an economy-weighted, free-float index with 30 financially sound, well-established companies listed on the BSE. These 30 firms, among the most successful and highest traded, represent various industries in India.

Why is Sensex used?

Sensex presents a broader picture of the BSE-listed stocks’ performance and can be utilised to assess the potential impact.

What is the full form of Sensex?

The full form of Sensex is Sensitive Index.

Why does the Sensex fluctuate?

Several factors can lead to fluctuations in the stock prices, including economic indicators, corporate earnings, international factors, and investor sentiment. And since the stock prices of the companies listed play a crucial role in determining Sensex’s value, it eventually fluctuates too.

Which is better Sensex or Nifty?

There’s no straightforward answer. It depends on your investment goals and preferences:

  • Nifty is broader, including more companies, while Sensex focuses on a smaller set of well-established companies.
  • Nifty may provide better diversification due to its larger number of constituents.
  • Sensex is often considered a historical benchmark and has a longer track record.
  • Investors often use both indices to gauge the overall market sentiment and diversify their portfolios.

What is Sensex and Nifty?

Sensex (short for ‘Sensitive Index’) tracks the performance of the Bombay Stock Exchange (BSE), while Nifty (short for ‘National Fifty’) is the benchmark index for the National Stock Exchange (NSE).

What is the full form of Sensex?

The full form of Sensex is the Stock Exchange Sensitive Index. It represents the Bombay Stock Exchange (BSE) and is the oldest stock exchange in India. The Sensex is a free-float, economy-weighted index that tracks 30 financially sound and well-established companies listed on the BSE.

Which is better Sensex or Nifty?

Both Sensex and Nifty are benchmark indices, with Sensex representing the BSE and Nifty representing the NSE. Nifty includes 50 stocks, making it a broader index, while Sensex focuses on 30 top-performing stocks. Sensex, being more niche, often performs better when the market is bullish, driven by the strong performance of leading companies.

What are Sensex and Nifty?

There are two stock exchanges in the Indian financial system: the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Each exchange has an index to gain insights into the performance of the market. Nifty is the index of the National Stock Exchange, and Sensex is the index of the Bombay Stock Exchange.

How many stocks are there in the Sensex?

The Sensex contains 30 stocks chosen based on liquidity, market capitalisation, and industry representation. These stocks are among the largest and most actively traded on the Bombay Stock Exchange. The Sensex covers various sectors, offering a broad view of India's economy.

Why does Sensex have 30 stocks?

The Sensex has 30 stocks to ensure a balanced representation of the Indian economy. These stocks are selected based on their market capitalisation, liquidity, and industry representation, ensuring they reflect the performance of major sectors.

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