What is Sensex? All About Sensex
The Sensex is a stock market index that tracks the performance of the Bombay Stock Exchange (BSE), one of the oldest and largest stock exchanges in India. The index comprises the 30 largest and most actively traded stocks on the BSE, representing various sectors, including banking, energy, manufacturing, and technology.
The Sensex is considered a key indicator of the overall health of the Indian stock market and is widely watched by investors, analysts, and economists in India and worldwide. Changes in the Sensex are closely watched as they can signal trends in the Indian economy and provide insights into market sentiment and investor confidence.
History of Sensex
The history of the Sensex dates back to January 1, 1986, when the BSE first introduced the index with a base value of 100. At the time, the index comprised 30 stocks and was designed to provide a benchmark for the overall performance of the Indian stock market. Over the years, the Sensex has evolved and expanded to include more companies, reflecting changes in the Indian economy and financial markets.
One of the most significant events in the history of the Sensex occurred in 1991, when the Indian government introduced economic liberalization measures to open up the country's markets to foreign investment. This led to a surge in foreign investment and a period of rapid economic growth, which was reflected in the performance of the Sensex.
Another important milestone in the history of the Sensex was the global financial crisis of 2008, which had a significant impact on the Indian economy and financial markets. The Sensex experienced a sharp decline in value after the crisis, but eventually rebounded and reached new highs in subsequent years.
Today, the Sensex is one of the world's most widely watched and respected stock market indices and serves as an important indicator of the health and direction of the Indian economy and financial markets.
How does it work?
The Sensex is calculated using a free-float market capitalization-weighted methodology, which means that the index is weighted based on the total market value of the available shares for trading, as opposed to the total number of outstanding shares.
The calculation of the Sensex involves taking the sum of the market capitalizations of the 30 companies included in the index and then dividing this total by a number known as the index divisor. The index divisor is used to adjust the index for changes in the market value of the stocks due to events such as stock splits, bonus issues, and rights issues.
Changes to the composition of the Sensex are made periodically based on various criteria, such as the companies' market capitalization, trading volumes, and sectoral representation. The BSE Index Committee is responsible for making decisions on changes to the index, and its decisions are based on a set of well-defined rules and criteria.
The Sensex is updated in real-time during trading hours, with changes in the stock prices of the constituent companies reflected in the index value. As a result, the Sensex provides investors, analysts, and policymakers with a real-time snapshot of the performance of the Indian stock market and the overall health of the Indian economy.
Calculation of the Sensex
The calculation of the Sensex involves three main steps:
Determine the free-float market capitalization of each of the 30 companies included in the index. Free-float market capitalization refers to the total value of a company's shares that are available for trading, as opposed to the total number of outstanding shares.
This is calculated by multiplying the total number of outstanding shares by the price per share, then adjusting for shares not available for trading, such as those held by insiders, promoters, or government entities.
Calculate the total free-float market capitalization of all 30 companies included in the index by adding together the free-float market capitalizations of each company.
Divide the total free-float market capitalization of all 30 companies by the index divisor to arrive at the Sensex value. An index divisor is a number used to adjust the index for changes in the market value of the stocks due to events such as stock splits, bonus issues, and rights issues.
The index divisor is calculated by dividing the total market capitalization of the 30 companies included in the index at the base year by the base value of the index. The base year for the Sensex is 1978-79, and the base value is 100.
FAQ
What is the difference between Sensex and Nifty?
ANS: The Sensex and the Nifty are both stock market indices in India, but they differ in terms of their composition and calculation methodology. The Sensex is calculated based on the market capitalization of 30 large and well-established companies listed on the Bombay Stock Exchange (BSE). In comparison, the Nifty is calculated based on the market capitalization of 50 large and well-established companies listed on the National Stock Exchange (NSE).
How is Sensex used in investing?
The Sensex is often used as a benchmark for the overall performance of the Indian stock market. Investors can use it to track the performance of their portfolios or make investment decisions.
For example, suppose the Sensex is increasing. In that case, it may indicate that the overall market is performing well, and investors may consider buying stocks. If the Sensex is decreasing, it may indicate that the market is experiencing a downturn. Investors may consider selling stocks or holding off on new investments.
How often is the composition of the Sensex changed?
ANS: The composition of the Sensex is reviewed periodically, typically every six months, by the BSE Index Committee. The committee evaluates the performance and market capitalization of the current constituents and considers potential new companies that meet the index criteria. Changes to the index composition are announced a few weeks before they are implemented.
How has Sensex performed over time?
ANS: The performance of the Sensex has varied over time, with periods of rapid growth and periods of decline. Over the long term, however, the Sensex has generally exhibited a positive trend, with a compound annual growth rate (CAGR) of around 16% since its inception in 1986. However, past performance is not a guarantee of future results and there are no guarantees of positive returns.
Can foreign investors invest in the Sensex?
ANS: Foreign investors can invest in Indian stock markets, including the Sensex, subject to certain restrictions and regulations. Foreign investors can invest in Indian stocks through various routes, such as the Foreign Portfolio Investment (FPI) or the Foreign Direct Investment (FDI) route.
What are the factors that affect Sensex?
ANS: The Sensex is influenced by various factors, including economic indicators such as GDP growth, inflation, and interest rates; global events such as geopolitical tensions, changes in commodity prices, and shifts in global trade policies; and company-specific factors such as earnings reports, management changes, and regulatory actions.
How is the Sensex different from the Dow Jones Industrial Average (DJIA)?
ANS: The Sensex and the DJIA are both stock market indices, but they differ in their composition and calculation methodology. The Sensex is based on the market capitalization of 30 companies listed on the Bombay Stock Exchange, while the DJIA is based on the stock prices of 30 large and well-established companies listed on the New York Stock Exchange (NYSE) and Nasdaq. Additionally, the calculation methodology for the Sensex and the DJIA differs, with the Sensex using free-float market capitalization and the DJIA using a price-weighted average.
What are the benefits of investing in Sensex?
ANS: Investing in the Sensex can expose investors to the Indian stock market and the potential for long-term capital appreciation. The Sensex is often considered a benchmark for the overall performance of the Indian economy. Investing in the index can provide diversification benefits and a way to hedge against inflation. However, investing in the Sensex, like any investment, carries risks and there are no guarantees of positive returns.
Can individual investors buy the stocks included in the Sensex?
ANS: Individual investors can buy the stocks included in the Sensex, either directly through a stockbroker or indirectly through mutual funds or exchange-traded funds (ETFs) that track the index. However, investing in individual stocks carries greater risk and requires more research and analysis than investing in a diversified portfolio of stocks through a mutual fund or ETF.
How is the Sensex affected by currency fluctuations?
The Sensex is denominated in Indian rupees, so fluctuations in the value of the rupee relative to other currencies can affect the index. For example, if the rupee weakens relative to the US dollar, it may cause the Sensex to increase in value as the dollar value of Indian stocks rises. Conversely, if the rupee strengthens relative to the US dollar, it may cause the Sensex to decrease in value as the dollar value of Indian stocks falls.
Find The Best Finance Advisor On Finndit.Com
