What is Sensex and How is it Calculated?

Before venturing into the stock market, it is essential to know about the jargon used in the stock market. Let’s take a look at What is Sensex?

The term Sensex was coined by a market analyst named Mr Deepak Moit. The word is a combination of two words: Sensitive and Index.  

Sensex is an index that reflects the Bombay Stock Exchange and was founded in 1875. It is also known as BSE Sensex or S&P BSE Sensex. BSE is the oldest stock index of India and was launched in 1986. It consists of 30 active stocks which are acquired from different companies and traded actively in the exchange market. Stocks that are listed on BSE are the most actively traded stocks, as well as are some of the biggest corporations. 

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The stock market movement can be predicted with the help of S&P BSE Sensex. BSE and S&P are used to calculate Sensex. The 30 largest companies which are listed in the Sensex tell the status of the Indian economy. 

But, if you are a novice investor and planning to invest, you should consider joining a good stock market institute to understand the stock market’s working. Many institutes are available in the market, but The Thought Tree is the best among them as they provide mentorship to their students. 

What is the Purpose of Sensex?

1. Sensex Represents the Standard

Sensex is a standard for investors and traders who want to observe the development of their investments in BSE as Sensex offers comprehensive data from several sectors.

2. For Viewing the Market Movement 

The Sensex is directly proportional to the movements of the Indian stock market. If Sensex goes up, then the prices of the 30 stocks listed on the BSE have gone up. If the Sensex falls, then the prices of the 30 stocks listed on the BSE have gone down.

3. Sensex for Index Derivatives

Investors and traders in India use S&P BSE Sensex for investing and trading because it offers the correct information about the companies of Sensex. 

Here is a list of 30 stocks comprising the BSE Sensex as of December 2021:

Company NameNo. Of SharesWeightage
Asian paints959.2 2.3
Axis Bank3,061.52.8
Bajaj Finance602.62.8
Bajaj Finserv159.11.6
Bharti Airtel5,455.62.5
Dr. Reddys Lab166.30.9
HCL Technologies2,713.72.0
HDFC Bank5,507.79.3
ICICI Bank6,903.77.8
IndusInd Bank757.10.9
Kotak Mahindra Bank1,980.54.1
L & T1,404.34.0
M & M1,243.21.2
Maruti Suzuki302.11.5
Power Grid5,231.60.8
Reliance Ind.6,762.112.2
Sun Pharma2,399.31.3
Tata Steel1,204.11.4
Tech Mahindra967.41.6
Ultratech Cement288.61.3

How is Sensex Calculated?

Sensex is calculated with the help of the “free-float market capitalization” method, and it is the best method for calculating a stock market index.

In the past, Sensex was calculated with the help of the weighted market capitalization method. But, since September 1st, 2003, the free-float market capitalization method has been used for calculating the Sensex value. 

The top 30 companies are taken into account and are revised to make Sensex a reliable index.

FreeFloat Market Capitalization = Market Capitalization * FreeFloat Factor

Free Float: Free Float is the stock for investing, but all stocks are not taken into account for free-floating. The shares held off can be government holdings, and these shares are not considered free-floating. 

Market Capitalization: Market capitalization combines stocks of 30 companies listed on the stock exchange. The value of a company’s market capitalisation is acquired by multiplying its stock price and the number of stocks provided by the company.

Free Float Market Capitalization: The total value obtained by the formula given above is multiplied by the free-float factor to find the free-float market capitalization. The free float factor is founded after examining the company’s data given for its free-floating stocks. 

The free-float market capitalization of all the companies is all summed up. The total value is divided by an index divisor to acquire the Sensex value. This divisor is altered for changes made in stocks and various corporate actions. 

Market capitalization = Share price per share * number of shares provided by the company

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After the free-float market capitalization is founded, then the value of BSE Sensex can be calculated using this formula:

BSE Sensex Calculation

Value of Sensex = (Total free float market capitalization/ Base market capitalization) * Base period index value.

The base period (year) of the Sensex calculation is 1978-79. The base value index is 100. Use the formula given above for calculating the BSE Sensex value.

The Bottom Line

So to sum it all up, Sensex is a reflection of the economy and the market and how the stocks of several companies are operating. It reveals how the businesses and sectors are working in the stock market. 

Sensex is the oldest and the most trusted index in India. Sensex is used for viewing the complete development and the upward and downward movement of the market through which one can evaluate the economy and invest in a good company.

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