What Is Sensex?
Most people are likely to be familiar with the word ‘Sensex’ with respect to domestic stock markets in India, but some may not be able to provide an appropriate answer when faced with the question of ‘What is Sensex?’ The acronym BSE Sensex, meaning ‘Bombay Stock Exchange Sensitive Index’- a term coined by analyst Deepak Mohanti, is generally viewed as the benchmark of the Bombay Stock Exchange and is the oldest stock market index in the country, initially compiled in 1986. It includes 30 of the largest and most frequently traded companies on the Bombay Stock Exchange with the base year of 1978-79 taken for its calculations. It is also sometimes referred to as the BSE 30. The index’s composition is reviewed biannually, in June and December.
If a company is included as part of the index, it satisfies the following criteria:
- It must be listed under the Bombay Stock Exchange in India.
- It must primarily consist of large or mega-cap stocks.
- It must be relatively liquid.
- Companies must contribute in keeping the sector balanced with the country’s equity market.
- Earnings must be generated from coactivities.
How Is Sensex Calculated?
The Sensex, also known as the BSE Sensex, is a stock market index that tracks the performance of the top 30 companies listed on the Bombay Stock Exchange (BSE). It is calculated by taking the sum of the free-float market capitalisations of these 30 companies, adjusted by their respective weights.
These weights are based on the market capitalisation of shares that are available for public trading (free float), divided by a base market capitalisation, and multiplied by the base value of the index.
The formula for calculating Sensex is:
Sensex = Free-Float Market Capitalisation of 30 Companies / Base Market Capitalisation * Base Value of the Index
The base year used for calculation is 1978-79, and the base market capitalisation is ₹25,041.24 crore, with a base value of 100.
Example:
Let’s assume the Sensex includes 3 companies, with the following free-float market capitalisations:
- Stock X: 20% weight, price ₹150
- Stock Y: 30% weight, price ₹250
- Stock Z: 50% weight, price ₹400
The free-float market capitalisation for each stock would be:
- Stock X: 20 * 150 = ₹3,000
- Stock Y: 30 * 250 = ₹7,500
- Stock Z: 50 * 400 = ₹20,000
Total Free-Float Market Capitalisation = ₹3,000 + ₹7,500 + ₹20,000 = ₹30,500
Thus, the Sensex value would be:
Sensex = 30,500 / 25,041.24 * 100 = 121.79
The Sensex is updated at the end of each trading day, providing a snapshot of market performance.
How To Invest In Sensex?
Investing directly in the Sensex index is not possible. Instead, you can invest in Sensex index funds, which are essentially mutual funds that have the same group of stocks as that of the index. The primary aim of the Sensex index fund is to replicate the performance of the index. Here’s an overview of how you can invest in these funds.
- Step 1: First, open a demat and trading account with a stockbroker. In addition to these two accounts, you also need to have a bank account.
- Step 2: Once they are opened, log into your trading account using your user credentials.
- Step 3: Navigate to the mutual fund section of the trading portal.
- Step 4: Browse through the list of Sensex index funds and choose the one that you want to invest in.
- Step 5: Enter all the relevant details such as the amount, mode and frequency of investment.
- Step 6: Submit the details to place the request.
That’s it. The amount you specified will be withdrawn from your trading account and invested in the Sensex index fund of your choice.
Advantages of SENSEX
- Listing on the Sensex increases a company’s visibility, attracting more attention from investors.
- Being part of the BSE Sensex enhances a company’s reputation, as it includes high-performing businesses.
- Companies listed on Sensex can raise share capital more effectively, aiding in funding and growth.
- The index provides opportunities for business expansion, including mergers and acquisitions.
- Sensex listing helps improve risk distribution, enhancing investor confidence.
- It offers incentives that can boost worker efficiency and overall company performance.
Major Milestones of Sensex
Over the years, Sensex has crossed several key milestones. Let’s quickly go through some of the major milestones in the history of the index.
| Year | Major Milestone |
| July 25, 1990 | The Sensex crossed the 1,000-point mark for the first time, just 4 years after its launch in 1986. |
| January 15, 1992 | The Sensex crossed the 2,000-point mark for the first time, just 2 years after it touched the 1,000-point mark. |
| April 29, 1992 | The Sensex crashed severely by 12.77% owing to the Harshad Mehta stock market scandal. |
| October, 1999 | The Sensex touched the 5,000-point mark for the first time in its history |
| January 02, 2004 | The Sensex touched 6,026.59 points due to the Information Technology boom in India. |
| December, 2007 | The Sensex touched 20,000 points for the first time due to aggressive stock market investments by both domestic and foreign investors. |
| 2014 | The value of Sensex crossed that of the Hang Seng index and became Asia’s highest-value index. |
| May 23, 2018 | The Sensex crossed the 40,000-point mark for the first time in its history. |
| January 21, 2021 | The Sensex breached the 50,000-point mark after recovering from the COVID-19-induced stock market crash. |
| December 14, 2023 | The Sensex crossed the 70,000-point mark for the first time in its history. |
Conclusion
Sensex’s value over time can be used as a gauge for market behaviour as well as for benchmarking portfolio performances, comparing investments and for analyzing Index Funds, Index Futures, or Index Options.
Analysts, Investors and Traders use it to gauge the behaviour of the Economy economy, both on a day-to-day basis as well as in terms of how it is affected by both domestic or global political and socio-economic events. As such, nervous eyes lie fixated on the fluctuations of the sensex during COVID-19, which has already resulted in the worst crash in its history on March 23rd, 2020, where it plummeted by 3,935 points.
FAQs
What is Sensex in simple words?
The S&P BSE Sensex, also known as Sensex, is a stock market index that represents a group of fundamentally strong and well-established companies listed on the Bombay Stock Exchange (BSE).
How does the Sensex work?
The Sensex is a stock market index that’s composed of 30 well-established and fundamentally strong companies from various sectors listed on the BSE. The index has a value that’s calculated by dividing the current market capitalisation of all of its stocks by the market capitalisation of all of its stocks as of the base year, which is then multiplied by the base index value. If a majority of the stocks in the Sensex index rise, the value of the index increases and vice versa.
Why is Sensex used?
The Sensex is used widely by investors, fund managers and other market participants to gauge the performance of the overall Indian stock market. The index also provides insights into the market sentiment and economic health of the country. Furthermore, Asset Management Companies (AMCs) often use the index as a benchmark for their mutual funds.
Why does the Sensex fluctuate?
The value of the Sensex index is based on the market capitalisation of its constituents. Changes in the stock prices of its constituents are likely to cause fluctuations in the index’s value. Some of the factors that cause the value of the Sensex to fluctuate include market sentiment, corporate earnings, economic health, interest rates and political developments.
