Indexes are numerical representations of a stock market’s performance, and the index’s value fluctuates along with the stock prices. To compare the performance of investments to a relevant market index, it is necessary to use an index.
One such index is the Bombay Stock Exchange’s Benchmark index, known as the Sensex. As an amalgamation of the words ‘sensitive’ and ‘index’, Sensex is operated by Standard & Poor’s (S&P) and is also India’s oldest stock index. Investors and analysts use it to track the economic cycles in India and the rise and fall of specific sectors.
Please continue reading to know more about Sensex and what it is all about.
A one-word answer to “what is Sensex?” is that it is a market index.
A market index indicates the overall performance of all publicly traded firms. In the stock market, it is a measurement of numerous elements such as market performance, price fluctuations, etc.
The Sensex, commonly known as the S&P BSE Sensex, is one of India’s oldest market indexes. The Sensex represents the Stock Exchange Sensitivity Index, and it includes the top 30 businesses listed for trading on the Bombay Stock Exchange.
Since India’s economic liberalisation in 1991, Sensex has enjoyed substantial development. In the 21st century, the population increased from 5,000 in early 2000 to over 42,000 in January 2020. This is primarily due to India’s booming economy, which has risen at one of the fastest rates in the world for years.
On April 18, 1992, the BSE Sensex fell 12.7%, its most significant drop ever, after the exposure of a scheme in which a renowned broker diverted funds from the public banking sector to invest in stocks.
The expansion of India’s economy and Sensex is mainly attributed to the increase of the country’s middle class and vice versa. It is estimated that by 2030, over 80% of Indian families will have a median income, up from around 50% in 2019. The middle class is a significant force in driving consumer demand.
In 2019, India’s economic growth reached its lowest point in a decade. The onset of the worldwide coronavirus pandemic at the beginning of 2020 has further slowed the economy, thus also the growth of Sensex and placed a shadow on future gains.
So How does Sensex Work?
The Sensex is computed using the free-float market capitalisation technique, which reflects the performance of thirty Sensex companies. The free-float market capitalisation technique reveals the percentage of a company’s marketable shares issued to the general public.
Many people often confuse the Sensex with the Nifty Index, even though they have significant differences.
Nifty is the abbreviation for National Stock Exchange Fifty, the index of the National Stock Exchange. Nifty is managed by the NSE subsidiary NSE Indices Ltd. Sensex, on the other hand, is governed by BSE. Sensex’s base index value is 100, whereas Nifty’s base index value is 1000.
Sensex comprises 30 well-established corporations, while Nifty is formed of 50 leading companies listed for exchange on BSE and NSE, respectively. So, you might be curious about the Sensex companies which are included in the index.
The Bombay stock exchange Sensex has 30 companies listed, representing the market’s overall state. The Sensex companies included in the index are mentioned below.
Sr. No. | Company Name |
1 | INFOSYS LTD. |
2 | TATA CONSULTANCY SERVICES LTD. |
3 | RELIANCE INDUSTRIES LTD. |
4 | ICICI BANK LTD. |
5 | HDFC BANK LTD. |
6 | HCL TECHNOLOGIES LTD. |
7 | BHARTI AIRTEL LTD. |
8 | INDUSIND BANK LTD. |
9 | STATE BANK OF INDIA |
10 | LARSEN & TOUBRO LTD. |
11 | TECH MAHINDRA LTD. |
12 | AXIS BANK LTD. |
13 | ITC LTD. |
14 | BAJAJ AUTO LTD. |
15 | OIL AND NATURAL GAS CORPORATION LTD. |
16 | TATA STEEL LTD. |
17 | NTPC LTD. |
18 | MAHINDRA & MAHINDRA LTD. |
19 | ASIAN PAINTS LTD. |
20 | POWER GRID CORPORATION OF INDIA LTD. |
21 | BAJAJ FINSERV LTD. |
22 | TITAN COMPANY LTD. |
23 | NESTLE INDIA LTD. |
24 | ULTRATECH CEMENT LTD. |
25 | SUN PHARMACEUTICAL INDUSTRIES LTD. |
26 | BAJAJ FINANCE LTD. |
27 | MARUTI SUZUKI INDIA LTD. |
28 | HOUSING DEVELOPMENT FINANCE CORP. LTD. |
29 | HINDUSTAN UNILEVER LTD. |
30 | KOTAK MAHINDRA BANK LTD. |
The list mentioned above consists of the 30 companies listed in the BSE, which make up the Bombay stock exchange Sensex. These companies are chosen from a multitude of sectors to represent the market condition over all industries combined equally.
Now that you know which companies are present in the BSE Sensex, you might be curious about how the Sensex is calculated?
The Sensex calculation was first done using the market capitalisation or “Full Market Capitalisation” technique but later switched to the “Free-float Market Capitalisation” approach on September 1, 2003. All significant index providers, including MSCI and FTSE, use this procedure for their index calculation.
Free float is the fraction of a company’s total issued shares easily accessible for public trade.
It does not account for promoters’ holdings, government holdings, or other stocks that will not be offered for trade in the normal run of events.
Market Capitalisation x Free Float Factor = Free-Float Market Capitalisation
The “market capitalisation” is the company’s value, and it can be calculated by multiplying the share price by the number of shares issued.
For example, suppose that Company A has 100 shares, and 70 of these 100 are open to the general population, while 30 are government-owned. Therefore, 70% of the shares are ‘free-floating,’ and the free float fraction is 70%.
Therefore, to do the Sensex calculation:
Sensex Value = (total free-float market capitalisation/base market capitalisation) * Base index value.
This calculation method helps achieve the value of the Sensex stock market and governs the current state of the stock exchange. Subsequently, there are numerous advantages of the Sensex as well.
The Sensex Stock market brings substantial advantages to investors other than just reflecting the state of the market.
Here are some of the noticeable features of Sensex, which prove to be a considerable advantage for investors:
Sensex gives investors more liquidity since the average daily volume traded is substantial. This liquidity makes it easier for any investor to purchase or sell their stocks on the BSE.
The Bombay stock exchange Sensex provides investment in various sectors through a single index, which offers investors an extensive selection of investment options. In addition to giving investment options, this is also advantageous for limiting the inherent risks of stock investing by allowing portfolio diversification.
The Stock Exchange Board of India (SEBI) administers the Sensex stock market. The SEBI is responsible for regulating stock exchanges, fostering their growth, and safeguarding investor rights. This indicates that a regulatory framework adequately protects investors’ interests when investing in the BSE Sensex. This considerably reduces the dangers associated with unscrupulous business practices.
The Sensex also provides the convenience of investing in numerous companies of substantial sizes and a proven track record, all at once, without the hassle of investing in each of them individually. This is one of the features of Sensex, for which it is well-reputed among investors.
These are just a few of the most considerable benefits of the BSE Sensex. But, with advantages comes disadvantages as well, and here are the cons or the limitations of the Sensex.
The Sensex stock market, like any other index, has its limitations.
Even though these reasons might not be that big of a deal for regular investors, industry veterans might avoid investing the majority of their portfolio in indexes due to the following reasons:
Over Long-term, the stock market has shown to be an excellent investment, but it has had its share of ups and downs throughout the years. Investing in an index fund, such as the Sensex, can provide upside potential when the market is doing well, but leaves you entirely exposed to market declines.
Investors with substantial exposure to stock index funds may choose to hedge their exposure to the index by shorting Sensex futures contracts or purchasing a put option against the index. However, because these instruments move in the exact opposite direction of one another, combining them would defeat the purpose of investing.
Thus, you consider these limitations when investing in the Sensex stock market. In the long term, such restrictions do not affect Sensex’s performance but are still worth noting.
SEBI’s role in the Sensex Stock Market
The Securities and Exchange Board of India (SEBI) is one of the chief governing authorities in India that monitors and effectively regulates the Indian Capital Markets, such as the BSE Sensex.
SEBI is responsible for formulating structured policy development of securities markets. Specifically, this division strives to protect the interests of traders and investors on the Indian stock exchanges such as Sensex.
Having an explicit knowledge about the workings of the Sensex and its effects on the Bombay Stock Exchange is essential for any investor, regardless of their experience.
Before investing in the index, you must have a comprehensive understanding of the Sensex calculation, its characteristics, and its limitations. Hopefully, the above article has helped you gather a thorough knowledge of Sensex.
The BSE selected these companies based on the following criteria:
Quarterly, the Index Committee reviews all BSE indexes, including the Sensex. However, there might not be any constituent changes even after a review meeting.
The Nifty index is the benchmark for the National Stock Exchange, and the national fifty constitutes the Nifty. The primary distinction between Sensex and Nifty is the number of its members. While Nifty 50 covers the top 50 actively traded firms on the NSE, Sensex comprises the top 30 actively traded companies on the BSE.
Sensex is a more specialised index than Nifty, which includes 50 companies.
Between 1986 and 2021, the Sensex grew at a compounded pace of almost 14 per cent every year.
This rise indicates the enormous growth of the Indian economy over that period, namely the expansion of the middle class in that country.
In the middle of the coronavirus health crisis, the Sensex fell by about 40 per cent in March 2020 but rebounded significantly for the year's balance. As of February 2021, Sensex has reached a new all-time high.
The Sensex is computed using a measure of free-float capitalisation. This approach is comparable to the market-capitalisation weighting method, in which businesses are weighted based on their proportion of the index's overall market capitalisation.
As a result, Sensex assigns more weight to the index's top firms. In contrast to the market-capitalisation technique, the free-float capitalisation method solely considers freely tradable shares instead of restricted shares or those owned by company insiders.
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