What is Sensex ? | SENSEX

Sensex is the index of Mumbai based stock exchange S&P BSE. The full form of BSE is Bombay Stock Exchange. Sensex is consisted of two words Sensitive + Index. Sensitive index means sensory index. Sensex was started in 1 January 1986. The 30 well-established and financially sound companies that are involved in it and keep changing, a committee has been formed to select these 30 companies. Due to indexing 30 companies, it is also known as BSE 30. It tells us about the movement in the stock price of the top 30 companies listed in BSE.




 

The word Sensex was coined by Deepak Mohoni a stock market analyst. Sensex is the benchmark index of our Indian stock market, which tells the up and down in the prices of listed shares in BSE ( Bombay Stock Exchange). Through this, we get information about the performance of the 30 largest companies listed in this. Sensex is India’s oldest stock market index, which started in 1986.


Sensex, which is a stock market index and its most important job is to keep an eye on all the shares of listed companies in the stock market, and then give us an average value after the day’s work.


The Bombay Stock Exchange (BSE), which is India’s oldest stock exchange, 30 major Indian companies has listed in it. These companies are called Blue Chipcompany. These companies according to market capitalisation are very big, it is currently 37% of the total GDP of India. These companies work in a way to set the trend of the Indian market and in simple words, index created to asses the value of shares of India’s big companies, which monitor the rising prices of these companies.


How does the Sensex UPs and DOWNs ?


Sensex it is the job of providing stock information to us. It monitors the fluctuations in the shares of 30 companies that come under their control. If the value of shares in the listed companies is rising in the sensex market then the sensex also increase and goes up. If the price of shares are falling in the sensex then the sensex also falls or down.

The most important reason to go down the price of shares and up is the performance of those companies. For example, if the company has launched a new and bigger project in the market then it is likely that the prices of the company will increase. Similarly, if the company is passing through difficulties then people want to quit it and the price of shares goes down.



How many stock exchanges in India ?


There are two major stock exchange in India:-

(i) Bombay Stock exchange – BSE (Mumbai)

(ii) National Stock Exchange – NSE (Mumbai)



How does Sensex Work ?

The work of the stock market index takes into account the prices of all the shares listed in the stock market and shows an average value so that people are aware of the UPs and DOWNs in the stock prices of all the shares.


How to calculate Sensex  

The sensex is calculated using the free-float market capitalisation method. Base year for calculation 1978-79 has been selected, at that time the base value of sensex was only 100 index points. Bombay Stock Exchange (BSE) was first calculated in 1986, and since 1 September 2003 the calculation of sensex from free-float method is being done.

In the free-float method, the company’s shares which is available for public trading (for general public to buy and sell). All shares may not be free floating some may be pledged, some may be hands of promoters and government bodies etc. Such types of locked shares are not considered as free-floating.


Free-float method = Share Price x (Number of Shares Issued – Locked-In Shares)

The Bombay Stock Exchange has more than 5000 companies registered. But the Sensex does not index all of these 5000 companies.

In the BSE-Sensex, the most active of these registered companies is the largest, financially strongest market capitalisation, and the top 30 companies holding a good cash in the Indian market are taken, which are available from various major industrial sectors. These companies are called ‘blue chip’ company. This list of 30 companies varies according to the market capitalisation of the stock market companies. This index of shares of top 30 companies is called a Sensex.




How sensex calculated, lets understand with an example


Suppose the index has two companies A and B.

Company A - has 500 shares out of which 300 are free floating or available for general public to buy and sell. The price of each share is Rs 80/-.

Company B - has 1000 shares out of which 700 are free floating. The price of each share is Rs 100/-.

Market capitalisation of company A = (No. of shares X price of each share) = (500 X 80) = 40 000

Market capitalisation of company B = (No. of shares X price of each share) = (1000 X 100) = 1 00 000

Free float factor for company A

Free floating shares / total shares X 100 = 300/500 X 100 = 0.60

Free float factor for company B

Free floating shares / total shares X 100 = 700/1000 X 100 = 0.70

Total free float market Capital of the index = (market capital of company A X free float factor for company A) (40 000 X 0.60) = 24 000 + market capital of company B X free float factor for company B) (1 00 000 X 0.70) = 70 000

Let us assume the base year index was 5000

Value of index = Total free float market capital of the index X 100 / Base year index

94 000 X 100/5000 = 1880

So the value of the index is 1880
   


The Process of choosing companies in the Sensex.


A committee has been formed to select these thirty companies which is called index committee. This committee includes professionals from many sections of the country and there is a representative of economists, managers, government and banks.


To join in list of top 30 companies the conditions of the company are to be completed.


(i) Company should have at least actively registered in the stock market for one year.

(ii) Company’s shares are compulsory to be bought and sold everyday.

(iii) Free-float market capitalisation weightage should be good for a company to be included in the list of companies.

(iv) According to the trade and value of the day, the company should be involved in big companies of the country.


What is Market Capitalisation and Free-float market capitalisation

It is very important for you to know both terms:-

Market Capitalisation :- Market capitalisation is the price of a company, which is based on its stock prices. The higher the price of a company it is. With the total number of shares issued by that company, to calculate the market capitalisation of a company, multiplying one share of the company by the current price.


Market capitalisation =  Total no. of shares issued by a company x Market price of each share.


Free-float Market Capitalisation :- This is the open part of the stock of a company that is available for general public to buy and sell. It is also called open market share. These can be purchased from the stock market.


There are many investors in a company that are share holders of the company, such as those who start a company, called promoters, government, trust, FDI etc. but in the BSE-Sensex, the shares of any company are included which are open market shares, which can be purchased from the stock market. To find a company’s free-float market capitalisation, with the market capital of that company, multiply the free-float factor.


Free-float Market Capitalistion = market capitalisation of a company x free-float factor.




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