Sensex stands for Sensitive Index, is the benchmark stock market index of the Bombay Stock Exchange (BSE) in India.
It is the oldest index of the Indian stock market and it is composed of the top 30 companies listed on the BSE based on market capitalization and is widely regarded as the barometer of the Indian stock market’s health and performance.
The Sensex reflects the overall market sentiment and provides a sight of how well the economy is performing. It is one of the most widely tracked indices in the world and is often used as a benchmark for portfolio performance by investors and fund managers.
History of Sensex
The history of Sensex began in January 1986, when the Bombay Stock Exchange (BSE) introduced it as a group of stocks representing the market capitalization of the top 30 companies listed on the exchange.
The index was initially based on a value of 100 with the base year of 1978-79. As the Indian economy and stock market changed over time, the methodology and composition of the Sensex were updated accordingly.
For example, in 1992, the base year of the index was changed to 1984-85, and in 2001, a free-float market capitalization-weighted index was introduced, which is still used to calculate the Sensex today.
The Sensex has achieved several significant milestones throughout its history. For instance, it surpassed the 1,000-point mark in 1991, the 5,000-point mark in 2003, and the 20,000-point mark in 2007. In 2017, it crossed the 30,000-point mark.
However, the Sensex has also experienced significant fluctuations during times of economic and political turmoil, such as during the global financial crisis in 2008 and the COVID-19 pandemic in 2020.
How Sensex is calculated?
- The Sensex is calculated by a free-float market capitalization-weighted methodology.
- According to this method, the weightage of each stock in the index is based on the number of shares that are freely available for trading in the market, and the market value of those shares.
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The formula for calculating the Sensex:
Sensex = (Total Market Capitalization of 30 Companies / Base Market Capitalization) x Base Index Value
The base market capitalization = the market capitalization of the 30 companies as on the base date, which is taken as January 1, 1978
The base index value = 100.
- The market capitalization of each company is calculated by multiplying its total number of outstanding shares with its current market price.
- The total market capitalization of the 30 companies is the sum of the individual market capitalization of each company.
- Once the calculation of total market capitalization is done, it is divided by the base market capitalization to get the value market capitalization index.
- Finally, the market capitalization index is multiplied by the base index value of 100 to get the current value of the Sensex.
- The Sensex is updated in real-time during live market hours based on the current market prices of the 30 stocks.
How Does Sensex Work?
The Sensex acts as an indicator that indicates the overall performance of the Indian stock market. As the prices of the stocks in the index change, the value of the Sensex also changes.
If the prices of most of the stocks in the index go up, the Sensex will also go up; this indicates a bullish trend in the market.
Similarly, if the prices of most of the stocks in the index go down, the Sensex will go down, this indicates a bearish trend in the market.
The Sensex is an important tool for investors and traders who use it to track the overall performance of the Indian stock market.
It is also used by policymakers, analysts, and economists to check the overall health of the economy, as the performance of the stock market helps to indicate economic growth.