We constantly come across statements like “the Sensex has soared today”, or “the market has crashed”. But do you know what Sensex is or how it is calculated? In this article, we will learn about this stock market index. But first, let’s understand what a stock market index is.
What is a Stock Market Index?
A stock market index is an indicator of the changes in the stock market. It is created by choosing some of the securities listed on the exchange on the basis of their market capitalisation or their industry. These securities represent the movement of the entire stock market. Any movement in the stock market index depicts the sentiments of the investors. One of the most popular stock market indices in India is the S&P BSE Sensex.
What is S&P BSE Sensex?
The S&P BSE Sensex, popularly referred to as Sensex, is the index that reflects the performance of the Bombay Stock Exchange (BSE). It is the oldest stock exchange in the country and is considered to be a reflection of our economic conditions. The term Sensex is a blend of two words- Sensitive and Index.
The S&P BSE Sensex comprises 30 stocks that are listed on BSE. These stocks are selected based on the following criteria:
The company must be listed on BSE
It must be a large-cap or mega-cap stock
The stock must be relatively liquid
The company’s revenue should be generated from its core activities
The company must have a diversified portfolio and a balanced sector focus in line with the Indian equity market
The movement of the Sensex reflects the movement in the stock exchange. If the value of the Sensex goes up, it indicates that the market has a positive sentiment. On the other hand, if its value decreases, it shows that the investors have a pessimistic view of the market.
As of September 2022, the Sensex comprises of the following companies:
Asian Paints Ltd.
Axis Bank Ltd.
Bajaj Finance Ltd.
Bajaj Finserv Ltd.
Bharti Airtel Ltd.
Dr Reddy's Laboratories Ltd.
HCL Technologies Ltd.
HDFC Bank Ltd.
Hindustan Unilever Ltd.
Housing Development Finance Corp
ICICI Bank Ltd.
IndusInd Bank Ltd.
Infosys Ltd.
ITC Ltd.
Kotak Mahindra Bank Ltd.
Larsen & Toubro Ltd.
Mahindra & Mahindra Ltd.
Maruti Suzuki India Ltd.
Nestle India Ltd.
NTPC Ltd.
Power Grid Corp of India Ltd.
Reliance Industries Ltd.
State Bank of India
Sun Pharmaceutical Industries Ltd.
Tata Consultancy Services Ltd.
Tata Steel Ltd.
Tech Mahindra Ltd.
Titan Co Ltd.
UltraTech Cement Ltd.
Wipro Ltd.
How is the S&P BSE Sensex Calculated?
The free-float market capitalisation method is used for the calculation of the Sensex. The first step in this calculation is to determine the free-float market capitalisation of the 30 companies that constitute the index. This can be done using the following formula:
Free-Float Market Capitalisation= Market Capitalisation*Free-Float Factor
Here, the free-float factor refers to the percentage of the total shares issued by the company which are readily available to trade. The shares issued by the company to its promoters, the government, etc. are not included here. The market capitalisation of the company is its total market value. This can be derived using the following formula
Market Capitalisation= Price of each share*Total number of shares issued by the company
Once the free-flat market capitalisation is determined, the value of the S&P BSE Sensex can be derived using the below formula:
Sensex = (Total free-float market capitalisation/ Base market capitalisation)*Base period index value
Here, the base period used is 1978-79. The base value index used for Sensex calculation is 100.
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