In the Indian stock market, where fortunes are made and unmade with each passing hour, one index has stood the test of time. The Sensex, or the S&P BSE Sensex, has been the guiding star for Indian investors and economists.
In this article, we will discuss the role of the Sensex in the Indian stock market, and how it is calculated.
What Is Sensex?
The Sensex is often referred to as the BSE Sensex. It is India’s oldest and most widely followed stock market index. It is a statistical indicator that reflects the performance of a select group of blue-chip stocks listed on the Bombay Stock Exchange (BSE).
But the Sensex is much more than just a number. It’s a barometer of the health of the Indian economy and the country’s financial well-being.
How Is Sensex Calculated?
Technically speaking, the Sensex is a free-float market-weighted index of the top 30 companies listed on the Bombay Stock Exchange. Here’s how the index is calculated:
- Selection of Constituent Stocks
The first step in calculating the Sensex is to select the right set of stocks. The BSE’s Index Committee chooses these stocks based on several criteria, including market capitalisation, liquidity, and trading volumes.
- Free Float Market Capitalisation
The Sensex is a market capitalisation-weighted index, meaning that companies with larger market capitalisations have a greater impact on its value. However, the calculation factors in only the free float market capitalisation, which is the total market capitalisation of a company’s shares available for public trading. Additionally, this implies that promotershares or government holdings are not included in the calculation.
- Base Year And Index Value
The BSE Sensex has a base year, which is used as a reference point for its calculation. The base value of the SENSEX was taken as 100 on April 1, 1979 and its base year as 1978–79. This allows for easy comparison and tracking of index performance over time.
Sensex Calculation Formula
The formula to calculate the Sensex is as follows:
Sensex Value = (Total free-float market capitalisation/ Base market capitalisation) * Base period index value.
Steps To Follow To Invest In Sensex
Individuals can be a part of the Sensex success story by investing in it. There are two ways to do this:
- By directly buying the stocks of companies that are part of the index
- By investing in index mutual funds that track the Sensex
Directly buying Sensex stocks
Investors can choose to buy stocks of companies that are included in the Sensex. This requires investors to first open a demat that can store securities in a digital form. Next, they must open a trading account that allows them to buy and sell securities online. Once the accounts are set up, you can invest directly in individual stocks that constitute the Sensex. However, it is advisable to consult a financial expert before making any investment decisions.
Investing in Index mutual funds
Index mutual funds seek to mirror the performance of a market index offering a convenient, cost-effective, and passive way for potential wealth creation. Index funds are based on an underlying index – like the Sensex of Nifty 50 – and provide investors with the opportunity of creating a blue-chip portfolio without having to pick individual stocks. Additionally, you do not need a demat or trading account to invest in index mutual funds; index fund units can be purchased directly from an AMC’s website/app, distributors/agents, and even banks.
For anyone interested in the Indian economy or considering investments in the nation’s stock market, understanding the Sensex is a fundamental step. It not only provides a snapshot of the market’s current condition but also serves as a valuable reference point for analysing historical performance and making informed financial decisions. As India’s financial landscape continues to evolve, the Sensex remains a constant beacon of hope to investors and economists alike.