What Is Sensex And How Is Sensex Calculated?

How do you know if a particular company’s stock is performing well? Simple - you use a performance benchmark maintained and monitored by professionals for comparison. And in India, Sensex is a market index offering one such yardstick to both beginners and seasoned investors.

But before we get to it, let us first understand what a stock market index is.

A stock market index is a statistical measurement of the ups and downs of a group of stocks or assets. It essentially measures the changes in the group’s stock prices over a specific period.

Whats is Sensex?

Think of Sensex as a numerical progress report for 30 of the most actively traded and financially stable company stocks listed on the BSE Limited.

Each of the 30 stocks belongs to a highly influential company and represents India's major industry/sector. The BSE Sensex value increases or decreases as and when the stock prices of these 30 companies fluctuate with changing economic cycles.  

To simplify further, the index reflects the overriding sentiment of the market participants (investors/traders), the market's equity health, and the broad state of the Indian economy. If the participants believe the economy will do well in the coming term, they will trade more actively and increase the index. 

Should the participants feel the opposite happening (economic slowdown), they will likely pull out of the market or stop investing/trading actively. This can cause BSE Sensex to plummet by a few points. 

Just consider the current market scenario. For a while now, investors have been speculating a bumpy ride for the Indian economy, given the rise of global inflation. This is indicated in the BSE Sensex's volatile performance at the beginning of June. 

On 6th June 2022, Sensex was at 55,675.32 when the market closed – down by 93.91 points or 0.17%. And only seven days before, the index had touched 55,785.70 after gaining 1,079.02 points on 30th May 2022 due to a rally of technology stocks. 

So you see, this is how the economic events recast the Sensex index. Its value directly reflects the true composition of the market at a given time. That's why knowing what Sensex’s performance over a specific period is can tell you a lot about the country's economic health and where to invest your money.

Now, a few questions remain. 

• First off, how are the 30 stocks pre-selected for the index?
• And secondly, how is Sensex calculated?

Let's dig a little deeper to answer these. 

How is Sensex Calculated?

The Bombay Stock Exchange (BSE) regularly updates the composition of Sensex to mirror the current market conditions. Initially, Sensex was computed using a weighted market capitalisation method. Since 2003, this has shifted to a free-float market capitalisation method. In this method, only the shares available for trading (free-float shares) are considered, excluding restricted shares held by insiders.

The formula for calculating the index is:

Free Float Market Capitalisation = Market Capitalisation × Free Float Factor

The free-float factor is the ratio of the freely traded shares to the total outstanding shares. This method ensures that Sensex represents the market value of the 30 largest and most actively traded stocks on the BSE relative to a base period. This approach better reflects the market dynamics and investor sentiment.​

How to invest in Sensex?

There are multiple ways to invest in the Sensex:

1. Direct investments

Open a demat and trading account with a reliable broker, complete the KYC process, and buy shares of companies listed on the Sensex directly from the stock market.

2. Exchange Traded Funds (ETFs)

Invest in ETFs that track the Sensex. ETFs offers diversification and professional management, making them a good option for various investors.

3. Index funds

These mutual funds mirror the Sensex's composition. Investing in index funds offers exposure to all the stocks in the Sensex, benefiting from the index's overall growth with minimal effort.

To summarise

The S&P BSE Sensex index indicates the movement of a select group of stocks listed on BSE. It tracks the movement of prices and changes the index value to provide a numerical representation of the same.

Now you know what the Sensex index is, how it is constructed, and how to evaluate it. You're now better informed to make sound investment decisions. So, start investing. Download Tata Capital’s Moneyfy app and explore India’s top-rated equity funds, index funds, and more.

FAQs

What is Sensex in simple words?

The Sensex, known as the Stock Exchange Sensitive Index, is a stock market index that represents 30 well-established companies listed on the BSE (Bombay Stock Exchange). It serves as a vital indicator of the overall performance of the stock market.

How is Sensex calculated?

The Sensex is calculated by summing the closing prices of its 30 constituent stocks, each multiplied by its assigned weight. This weight is determined by the free-float market capitalisation of each stock relative to the base market capitalisation and then multiplied by the base value of the index.

Are Sensex and BSE different?

Sensex and BSE are distinct entities. Sensex is a key market index representing the Bombay Stock Exchange (BSE), while Nifty is the benchmark index for the NSE or National Stock Exchange.

How are 30 companies selected in Sensex?

The 30 companies in the Sensex are selected based on criteria such as large or mega-cap status, liquidity, strong financial health, substantial revenue margins, listing on the BSE, and significant market share in their industry.

How is Sensex weightage calculated?

Sensex weightage is determined using a weighted average market capitalisation method. Each stock's market capitalisation is multiplied by a weightage factor based on its free-float market capitalisation and sectoral representation.