Sensex

Sensex

• BSE SENSEX (Short for Stock Exchange Sensitive Index) is the benchmark index of the Bombay Stock Exchange (BSE).
• Composition: It measures the performance of the 30 of the largest, most liquid and financially sound companies across key sectors of the Indian economy that are listed at BSE Ltd.
• Launch Date: It was launched on 2nd January 1986.
• Base Year: 1978–79 (3 April 1979)
• Review of Constituents: The inclusion and exclusion of companies is reviewed semi-annually, in June and December.
• Method: It is calculated using the free float market capitalisation methodology.

How Does the SENSEX Work?

Composition

• The SENSEX consists of 30 large, liquid and financially sound companies listed on BSE.
• These companies are selected from key sectors of the Indian economy, allowing the index to broadly represent the equity market.

Calculation — Free Float Market Capitalisation Method

• The SENSEX is calculated using the free float market capitalisation method.
  • Market Capitalisation = Share Price × Total Outstanding Shares
  • Free Float Market Capitalisation considers only those shares that are readily available for trading in the market, rather than all outstanding shares.
  • Each company receives a weight in the SENSEX according to its free float market capitalisation.
  • Therefore, a company with a higher free float market capitalisation generally has a greater influence on movements in the SENSEX.
• Example
  • Company A → Free Float Market Cap = ₹1,000 crore
  • Company B → Free Float Market Cap = ₹500 crore
  • Total = ₹1,500 crore
  • Therefore:
    • Company A weight = 66.67%
    • Company B weight = 33.33%
  • Hence, movements in Company A’s share price would have a greater effect on the index.

Index Calculation

• SENSEX = Total Free Float Market Capitalisation of Constituent Companies ÷ Index Divisor

Significance

• Market Benchmark: Reflects the overall performance of major companies listed on BSE.
• Investor Sentiment: Its movement provides an indication of broad market sentiment.
• Performance Benchmark: Investors and fund managers can compare the performance of their portfolios against the SENSEX.
• Economic Indicator: It can reflect changing market expectations about economic and corporate conditions, though it should not be treated as a direct measure of the overall health of the economy.

Simple Understanding

Share Prices Change → Free Float Market Capitalisation Changes → SENSEX Changes