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What Is Sensex And How It Works

An Overview

Every time we switch to a news station or even via friends who routinely participate in equities, many of us hear the word "Sensex." It's typical to hear statements like "the market has plummeted," "Sensex rose today by 100 points," etc. What do the market and the Sensex imply, then? What do the Sensex points represent? And, what is Sensex?

Here, we'll explain how to compute the Sensex in a simple way and help novice investors understand the intricacies around it.

What Is Sensex?

Sensex is a term that new investors may not be familiar with. It represents the aggregate stock market value of 30 particular firms that are listed on the Bombay Stock Exchange. These companies represent some of the biggest firms and are among the most frequently traded equities. This list of 30 stocks may be updated at any moment by BSE.

Investors like to purchase equities when the Sensex is said to be rising since it indicates that the economy is expanding. On the other side, if the Sensex is down, individuals delay investing in the economy out of a lack of faith in its prospects. In order to comprehend industry-specific development, general growth, the trajectory of the national stock market, etc., market research experts primarily follow the movements of the Sensex.

Understanding Sensex

The following are some of the main factors used to choose the 30 stocks that make up the Sensex:

  • Should be included in BSE
  • It must be a huge or mega-cap stock. Companies having a market capitalization of between ₹7000 crores and ₹20,000 crores are considered large cap. Companies having a market capitalization of more than ₹20,000 crores are categorized as mega caps.
  • Stocks that are relatively liquid are chosen.
  • The company's primary sources of income should be those operations.
  • Similar to the Indian equities market, the firm should have a varied and well-balanced sector concentration. Now, let us jump to learn how the Sensex works.

How Does The Sensex Work?

The performance of 30 of the biggest and busiest firms listed on the Bombay Stock Exchange (BSE) in India is mainly tracked by the BSE Sensex. It provides a brief summary of the stock market's progress and is frequently used as a benchmark for the market's performance overall. Economic expansion, governmental initiatives, and world events are just a few of the variables that affect how the Sensex changes over time.

How Is The Sensex Calculated?

The weighted market capitalization approach was formerly used to construct the Sensex. The BSE Sensex value is now determined utilizing the Free Float Market Capitalization technique as on 1st September, 2003, nevertheless. 

The following are the main stages in its calculation:

  • The free-float market capitalization technique starts by choosing the 30 firms that make up the index. 

FreeFloat Market Capitalization is calculated using the following formula: Market Capitalization * FreeFloat Factor.

 It is determined by: Market capitalization = Share price per share* total number of shares legally issued by the company

  • The proportion of a company's total issued shares that are easily tradable by the general public is known as the free float factor. This also shows how many shares of a corporation are currently outstanding. This element does not account for shares that are granted to promoters, the government, or other entities that are not tradable by the general public. Therefore, a base period (year) of 1978–1979 is employed, and a base value of 100 index points is used.

How Has The Sensex Fared Over The Last Decades?

In the past few decades, the Sensex, a gauge of the Indian stock market, has seen ups and downs. In general, it has expanded throughout time, although there have been times when it shrank. It has been impacted by a number of things, including governmental policy, economic development, and world events. The Sensex has generally been a reliable indication of the health of the Indian stock market and has shown substantial long-term growth. The stock market, however, may be erratic in the near term, and previous success is not necessarily a reliable predictor of future outcomes.

The Sensex rose from about 18,000 across over 60,000 levels in the last ten years.

Wrapping Up

It may be exceedingly challenging for investors to watch every accessible stock before investing given a large number of listed firms in India. At this point, a market index is crucial in accurately portraying the whole market. As the Sensex is an important gauge of market activity, every investor should be familiar with its fundamentals and how the Sensex works.

 

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