What Is SENSEX?

[Shashank Bhaskar]

SENSEX is one of the most buzzing words that each one of us comes across every single day. Most of us read about it in the newspapers, watch on a news channel and hear from our friends or colleagues who regularly invest in stock markets. Further, phrases like Sensex today live, Sensex went up by 200 points, etc are common too. So, what does SENSEX actually mean? What is it? Let's find out!

What is SENSEX?

SENSEX is an acronym for Stock Exchange Sensitive Index. In simple terms, it is a combined value of 30 selected stocks that are listed on the BSE (Bombay Stock Exchange).  These stocks are the top traded stocks in the country and are from high-value companies. Moreover, these 30 stocks are revised at regular intervals by BSE.

When Sensex goes up, it is considered as a sign of a growing economy so the investors buy more stocks. On the contrary, when Sensex goes down, investors withdraw and hold back their money from investing in the stock market because it indicates a falling economy.

Generally, the Sensex movements are tracked by market research experts and analysts in order to understand the stock market trend in the country, the overall growth, as well as the industry-wide development.

How Sensex Selects the Top 30 Stocks?

The next big question is, on what criteria does Sensex today select the top 30 stocks? Here is your answer.

Following are the criteria that are used for selecting the top 30 stocks in Sensex :

• It should be listed on the Bombay Stock Exchange.
• Stocks with high liquidity are selected
• The stock should belong to the large or mega-cap category. In other words, the market cap of the stocks should range between ₹7,000 crores to ₹20,000 crores.
• The company should have a well-balanced and diversified industry focus aligning with the equity market of India.
• The maximum revenue of the company must come from its core or primary activities.

How is the Sensex Calculated?

Before 2003, the Sensex was computed with the help of the weighted market cap method. But after 2003, the value of Sensex is calculated with the help of the free float method or free-float market capitalization process. Below is how Sensex is calculated:

• The first step in the free float market capitalization method is to choose 30 companies that are going to form the index. Here is the formula to calculate free-float market capitalization:

Free Float Market Capitalization = Market Cap x Free Float Value.

In the above formula, the market cap stands for the total market value of the selected company. It is calculated using the following formula:

Market Cap = Number of shares issued by the company x Price of each share

Next, the Free Float factor is the percentage value that indicates the total number of shares issued by the company that are readily available for trade for the common people. Moreover, this is also an indication that the total number of outstanding shares that may be issued to the government, promoters, etc. that are not available for trade for common people are not included in the Free Float Factor.

Once free float market cap is calculated, the value of Sensex is computed using the below-mentioned formula:

Value of BSE Sensex =[ Free float market cap / Base market cap] x Base period index value

Note that, the base value here is 100, and the base year value is 1978-79.

That's about Sensex meaning and how it is calculated!

Sensex is an important index that acts as an economy or market indicator for investors. By checking Sensex today, you can make informed investment decisions.