The Sensex serves as a barometer of the nation’s stock market sentiment. As someone new to the market, it is vital to understand its functioning. Read this post to know more.

With the Sensex recently breaking the 67,000 points mark recently, the bullish market sentiment continues to pick up pace in India. The remarkable rise of the Indian stock market since the pandemic has attracted millions of new investors who are currently on their journey to demystifying the markets.

A common query among such new investors is the meaning of indices like Sensex. Let’s take a detailed look at what is Sensex, how it is calculated, its milestones, and more-

What is Sensex?

Sensex which stands for Stock Exchange Sensitive Index is a stock market index for Bombay Stock Index (BSE) that measures the price movements of 30 of the largest companies listed on the BSE. In simple terms, Sensex is the combined value of the top 30 stocks of the companies listed on the BSE. The companies included in the Sensex represent various industrial sectors, including Banking, IT, Energy, Pharma, Telecom, Power, etc., making it a comprehensive indicator of the country’s economic health.

Sensex was launched by the BSE in 1986 at 100 points, considering 1979 as the base year. Recently in September 2023, it surpassed 67,000 points.

Also Read – What is Nifty?

How are 30 Companies Selected in Sensex?

To better understand Sensex's meaning, one should also know the factors BSE takes into consideration when selecting the 30 stocks that make up the index. The selection is primarily based on these five factors-

1. The company should be listed on the BSE

2. It should be a mega-cap (₹20,000 crore+ market cap) or large-cap (₹7,000- ₹20,000 crore market cap) stock

3. It should be relatively liquid, allowing investors/traders to conveniently buy/sell its shares

4. The core activities of the company should be responsible for primary revenue generation

5. The company should positively contribute to the sector it belongs to, aligning the sector with the overall equity market

It is also worth noting that the 30 companies included in the Sensex are not fixed. Based on the criteria listed above, BSE revises this list of 30 stocks.

List of 30 Stocks Comprising BSE Sensex

Now that you know how to define Sensex and how the 30 companies are selected, here are the companies part of the index as of 19th Apr’24

Source - https://www.equitymaster.com/india-markets/bse-replica.asp?order=mktcap-desc

How is Sensex Calculated?

Initially, Sensex was calculated using the “Full Market Capitalization” method. But since 2003, it has been replaced with the “Free-Float Market Capitalization” method.

Free-float means only the shares of a company that are available for public trading, excluding those held by promoters, governments, or other entities. For instance, if Company A has 1,000 shares but only 700 are available for public trading and 300 are held by promoters, the free-float factor of the company is 70%.

Market capitalization, on the other hand, is company valuation determined by multiplying the share price of the company with the total number of shares issued. Based on these factors, here’s how the Sensex is calculated-

1. Market capitalization and free float capitalization of all 30 companies are calculated

2. The free float capitalization of all the 30 companies is combined

3. A formula is applied;
   Sensex = [(Total Free Float Market Capitalization/Base Market Capitalization) x Base Index Value]

4. Here, the Total Free Float Market Capitalization is the total calculated in Step 2.

5. Base Market Capital is ₹2,501.24 crores, as prescribed by BSE

6. The Base Period Index Value is 100

7. Based on these values, the formula for Sensex will be [(Free Float Market Capitalization of 30 Companies/ ₹2,501.24 crores) x 100]

How to Invest in Sensex?

There are many different ways to invest in Sensex. Take a look-

1. Stock Purchases

   Open a trading and demat account and directly invest in the 30 Sensex stocks.

2. Mutual Funds

   If you’re new to the stock market, you can also consider investing in mutual funds that invest in those 30 stocks.

3. ETFs

   There are also ETFs (Exchange Traded Funds) that track Sensex. These funds invest in the same 30 stocks in the same proportion as the Sensex and are traded like stocks on exchanges.

4. Futures and Options

   Experienced traders and investors also trade in the futures and options contracts of Sensex.

Milestones of Sensex India

Sensex has witnessed several milestones over the years. Here are some of the most important ones-

Source - https://www.bseindia.com/static/about/History_Milestones.html

While the Sensex has achieved milestone after milestone over the last three decades, it has also crashed on many occasions, but still it emerged stronger after every downturn.

How Has Sensex Performed in the Last Decade?

In the last decade, or the period between 2013 and 2023, the overall market sentiment has been bullish. In 2013, the Sensex was trading around 20,000 points. Since then, it has grown over three times and recently surpassed 65,000 points in September 2023.

However, there have been some significant declines too. For instance, Sensex was trading around 41,000 points in February 2020 but crashed to 27,000 points by April 2000 with the onset of the COVID-19 pandemic.

Understanding Sensex to Make Informed Investment Decisions

As one of the most important indicators of the Indian equity markets and the country’s overall economy, Sensex deserves the attention of every trader and investor. If you’re new to the stock market, investing in mutual funds that invest in Sensex stocks can be a good option compared to direct stock investments.

With mutual funds, you get a readymade portfolio of stocks carefully chosen by experienced fund managers according to the scheme’s objectives. Discuss your requirements and expectations with a financial advisor to build an investment portfolio that could take you closer to your financial objectives.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.