What is Sensex?
Sensex, also known as the S&P BSE Sensex Index, is the benchmark index that tracks India’s Bombay Stock Exchange (BSE). The Sensex is composed of the 30 largest and most-traded stocks within the BSE, which ultimately measures India’s economic activity and performance.
The Sensex Index is reviewed every six months, alternating between June and December every year. Historically speaking, the Sensex is known to be the oldest stock index created in India. Often, the index is used for the purpose of measuring India’s current economic performance, along with the activities that occur within different industries of that emerging market space.
- The Sensex is India’s benchmark index for the Bombay Stock Exchange (BSE), which tracks the top 30 largest moving stocks within the country.
- The Sensex is calculated using a free-float capitalization methodology, rather than simply using market capitalization.
- Companies chosen to be on the Sensex are based on several criteria including whether the company is large or mega-cap, is liquid and has a healthy balance sheet, solid revenue margins, is enlisted in the BSE, and with a large market share in the industry that they operate in.
History of the Sensex
On April 18, 1992, the BSE Sensex experienced its worst fall, plunging 12.7% following the discovery of a scam wherein a broker within the industry illegally transferred money from the public banking sector over to a stock to raise its valuation. Beyond the controversy, however, the BSE Sensex’s experienced substantial growth since 1991, when India opened its economy to the world.
For example, in aggregate, before COVID-19, the Sensex rose from 5,000 during the early years of the 21st century to over 42,000 in January 2020. The exponential growth is contributory to not only India’s up and rising economy, but the expansion is also driven by the nation’s middle class, as they contribute greatly to the nation’s consumer demand.
Over the years, from an incremental perspective, India’s economic growth’s begun to slow down. In 2019, the country saw its lowest growth in the past decade. With the global COVID-19 pandemic among us, the Indian economy is slowing down even further, which will impact their gains in the future and its current market conditions.
Selecting Constituents for the Sensex
The components that comprise this index are selected by the S&P BSE Index Committee based on the following criteria:
- Listed in India’s BSE
- Large to mega-cap company
- Relatively liquid
- Solid revenue growth that stems from core activities
- Keeps that particular industry sector balanced and in line with the Indian equity market
How to Calculate
At the beginning of its release, the Sensex was initially calculated based on a weighted average distribution of each company’s market capitalization. However, over time, it’s been calculated based on a free-float capitalization method, where rather than using the company’s outstanding shares to calculate the market capitalization, it uses the float.
The float refers to the number of shares that are readily available to be traded within the secondary market. It means that the Sensex is now not calculated based on stocks that cannot be readily sold, such as shares held by insiders – CEO, executives, etc.
To calculate the free-float capitalization of a single company, the steps are as follows:
- Calculate the market capitalization of the company. Market cap is the number of shares outstanding multiplied by the share price.
- Multiply the market capitalization by the percentage of free float available relative to shares outstanding.
Here is an example:
WeLoveJeans is issued on the BSE, with 20 million shares of float and 40 million shares outstanding with a market price of $15 per share. It would mean that the company’s free-float is 50% (of total shares issued) and a market capitalization of $600 million. Thereby, the company’s free-float capitalization would be $600 million * 0.5 = $300 million.
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