What is Sensex: The Complete Guide

Introduction

Understanding Sensex and Its Importance in the Indian Stock Market

If you’re new to investing or curious about how the stock market works in India, you’ve probably heard the term what is Sensex. But what is Sensex? Simply put, the Sensex is a stock market index. It shows the overall performance of the Bombay Stock Exchange (BSE), one of India’s biggest stock markets. It helps investors like you understand how the market is doing.

When the Sensex rises, it means that most top companies on the BSE are performing well. When it falls, it shows the opposite. This makes Sensex an essential indicator for people looking to invest, as it gives a quick snapshot of market health.

Role of Sensex as a Barometer of Economic Health

Just like a thermometer tells you about your body’s temperature, Sensex tells you about the economy’s mood. If the Sensex is increasing over time, it generally indicates that the economy is performing well. If it’s falling, people might be concerned about factors such as inflation, low growth, or global events.

In short, the Sensex reflects investors’ confidence in the country’s economy.

What is SENSEX? 

‘What is Sensex’ is one of the many questions people have. Sensex meaning translates to Stock Exchange Sensitive Index. It’s a benchmark index of the Bombay Stock Exchange (BSE), India’s oldest and premier stock exchange. The actual name of the index is S&P BSE Sensex.

The Sensex comprises 30 stocks, representing the most traded stocks with the highest market cap. These companies represent diverse sectors like banking, automobiles, pharmaceuticals, energy, and technology, offering a snapshot of the country’s economic pulse.

Investors, analysts, and policymakers track the Sensex closely as it reflects the investor sentiment, overall stock market performance, and the economy’s general health.     

Composition: The 30 Constituent Companies

Here are the current 30 companies in the Sensex:

1. TATAMOTORS
2. ETERNAL
3. INDUSINDBK
4. TATASTEEL
5. SBIN
6. ITC
7. ICICIBANK
8. HDFCBANK
9. RELIANCE
10. HINDUNILVR
11. HCLTECH
12. INFY
13. NTPC
14. NESTLEIND
15. POWERGRID
16. BAJFINANCE
17. BHARTIARTL
18. AXISBANK
19. LT
20. KOTAKBANK
21. M&M
22. TCS
23. ADANIPORTS
24. BAJAJFINSV
25. TECHM
26. SUNPHARMA
27. ASIANPAINT
28. TITAN
29. MARUTI
30. ULTRACEMCO

Source – https://www.bseindia.com/markets/equity/EQReports/MarketWatch.html?index_code=16

Criteria for Inclusion in Sensex

Not every company can be part of the Sensex. To be included:

• The company must be listed on the BSE.
• It should have a high trading volume.
• It must be among the top companies by market capitalisation.
• It should represent a wide range of industries.

This helps the Sensex remain a good indicator of the overall market, and explains what is Sensex in terms of its composition

 How is the Sensex Calculated?

Calculating the Sensex involves the following steps:

• The calculation of the Sensex begins with picking 30 of the most actively traded stocks that represent a broad market and its sectors.

• The market cap of these 30 stocks is derived from the product of the current market price and the outstanding shares.   

• Then, the free-float market cap is worked out. Free-float market capitalization is the value of a company derived from shares held publicly. This value does not include shares held by promoters, government entities, and other strategic investors.

• The index is then computed by adding the free-float market cap of the 30 selected stocks and dividing this value by a predefined base value. The resulting value is the Sensex.

• The Sensex is updated biannually to make it relevant to reflect the market dynamics.   

  The formula is Sensex = (Total free-float market capitalization / Base market capitalization) * Base index value.

Where,

• Free-float market capitalization refers to the shares available for trading, excluding shares held by strategic investors.
• The base market capitalization is the market cap of a company.
• and  Base index value is the value for the calculation of the index. In this case, it is 100, with the base year as 1978-79.

As of 28 December 2023, the Sensex rate was 75,410 points. 

Introduction to the Free-Float Market Capitalization Method

How is Sensex calculated? It utilizes a method called the Free-Float Market Capitalization Method. This means it only considers the number of shares available for public trading. It doesn’t count shares held by promoters or governments.

Anyone trying to understand what is Sensex should also understand this method.

Step-by-Step Calculation Process

The following steps show how Sensex is calculated:

1. Find the market cap of each company: Share price × Number of publicly available shares.
2. Add up the market caps of all 30 companies.
3. Compare this total with a base value set in 1978-79.
4. The index moves up or down based on changes in this total.

Formula Used in Sensex Calculation

Sensex = (Current Free-Float Market Cap / Base Market Cap) × Base Value

This formula helps maintain consistency when calculating the index.

Significance of the Base Year and Base Value

The base year for the Sensex is 1978-79. Its value during that time was set to 100. This helps us compare today’s performance with the past. So, if the Sensex is 60,000 today, it means the market has grown 600 times since 1979.

Example Illustrating Sensex Calculation

Let’s say the total free-float market cap of the 30 companies is ₹80 lakh crore. The base market cap in 1979 was ₹100 crore. The base value is 100.

So, Sensex = (80,00,000 / 100) × 100 = 80,00,000

This is a simple example to help you understand how to calculate the Sensex.

How to Invest in Sensex?

It is not possible to invest in the Sensex market directly. One can invest in it by opening a brokerage account and investing in the 30 stocks that comprise the index. This is equity investment. Alternatively, one can invest through mutual funds, index futures and options, and ETFs. 

To invest in the Sensex, one must first have a bank account that will eventually be linked to the trading account to enable seamless fund transfers and withdrawals. Also, the Securities and Exchange Board of India (SEBI) has mandated that all physical securities be transferred to demat form. Hence, even a Demat account is a must. 

Opening a Demat Account

Having a Demat account is one of the primary requirements of trading in the stock market. The Demat account stores the securities electronically; thus, an investor can access them anywhere.    

A Demat account is easy to open online after following these steps:

• Select a reputed and registered Depository Participant.

• Fill out the online application form by providing all the relevant personal and bank details.

• Upload the relevant documents.

• Do an in-person verification by recording a video of yourself reading your PAN number and address and submitting it.

• Sign your application digitally. 

• Submit the form.

Opening a Trading Account

A trading account is the link between your bank and your Demat account. A trading account allows investors to buy and sell shares and is particularly essential for Futures  & Options. Opening a trading account involves the following steps:

• Choose a stockbroker after evaluating the brokerage rates and the services offered.
• Fill out the account opening and KYC forms available online. Submit the KYC documents. If opting for Futures & Options, provide Income proof, too.
• Do an in-person verification by recording a video of yourself reading your PAN card number. 
• Sign the online application form using an Aadhaar-registered mobile number.
• Submit the form.
• Upon verification by the broker, you will get your login credentials. 
•  Before you begin trading, add some money to your trading account.
• Place buy/sell orders.

Having a Bank Account

The first step to commencing any transaction in the finance world is to open a bank account. Opening a bank account can be done offline and online, too.  

Other Ways to Invest

If you don’t want to pick individual stocks, you can invest in:

• Index Funds – These track the Sensex and invest in the same 30 companies.
  
• Exchange Traded Funds (ETFs) – These also track the Sensex and trade like stocks.
  

So, when someone asks how to invest in Sensex, these are the ways.When you truly understand what is Sensex, you’ll see that index funds and ETFs are simple tools to get started.

When opting for the offline mode:

• Visit the nearest bank branch and fill out the Savings Account opening form.
• Submit the form along with the required documents.
• On verification from the bank, your account kit, including the account number will be dispatched via post.

When opting for the online mode:  

• Visit your chosen bank’s website.
• Click on the tab ‘Open a Savings Account.’
• Fill in all the relevant details. 
• Upload relevant documents. 
• Click ‘Submit’.

Milestones of Sensex India

Ever since its inception, the Sensex has achieved significant milestones. They are as follows:

• Early Years (1875-1985):

• 1875: The Native Share & Stock Broker’s Association is formed, marking the official establishment of the BSE.
• 1921: Clearing House operations begin.
• 1957: BSE gets permanent recognition under the Securities Contracts (Regulation) Act.
• 1986: The S&P BSE SENSEX, India’s first equity index, is launched.
• 1987: Investor’s Protection Fund (IPF) is introduced.

Modernization and Growth (1986-1999):

• 1989: BSE Training Institute (BTI) is inaugurated.
• 1990: S&P BSE SENSEX crosses 1000 mark.
• 1992: The Securities and Exchange Board of India (SEBI) is established.
• 1995: BSE On-Line Trading (BOLT) system is introduced.
• 1996: First major S&P BSE SENSEX revamp occurs.
• 1997: The Trade Guarantee Fund (TGF) and Brokers Contingency Fund (BCF) are introduced.
• 1999: Central Depository Services Ltd. (CDSL) is established.

Expansion and Diversification (2000-2015):

• 2000: Equity derivatives are introduced.
• 2001: Stock options, index options, and S&P BSE Dollex 30 launched.
• 2002: The Negotiated Dealing System (NDS) is established.
• 2003: T+2 settlement is introduced.
• 2004: S&P BSE SENSEX crosses 6000 for the first time.
• 2005: BSE becomes a corporate entity.
• 2006: The Indian Corporate Debt Market (ICDM) is launched.
• 2009: BSE STAR MF, FASTRADE™, and new transaction fee structure are introduced.
• 2010: Currency derivatives are introduced, the S&P BSE Shariah Index commences, and mobile-based trading is launched.

Recent Advancements (2016-Present):

• 2016: BSE becomes India’s first exchange to be recognized as a Designated Offshore Securities Market by the SEC.
• 2017: BSE launches the “BSE Startups” platform and becomes India’s 1st universal exchange with the launch of the commodity derivatives segment.
• 2018: BSE launches chatbot “Ask Motabhai” and receives SEBI “No Objection” to act as a “Facilitator” in non-competitive bidding.
• 2019: BSE StAR Mutual Fund introduces e-mandate facility, and BSE launches India’s first exchange-traded interest rate options.
• 2020: BSE’s RFQ platform for debt securities goes live, and BSE becomes India’s first exchange to introduce and adopt India Good Delivery Standards for GOLD and SILVER: BIS IS 17278: 2019.
• 2021: The S&P BSE Sensex crossed 60,000 to close at 60,048 points 
• 2022: BSE Technologies Private Limited announces the launch of KYC Registration Agency (KYC KRA) and BSE creates history by launching Electronic Gold Receipts (EGRs) on Diwali during muhurat trading.
• 2023: It crossed the 70,000 mark and was trading at over 75k level towards December end. 

Major Plunges in Sensex Stocks

The Sensex journey hasn’t been smooth sailing. Some significant plunges include:

• 1992 Harshad Mehta Scam: Investor fraud shook the market, and Sensex crashed by 62%.
• 2008 Global Financial Crisis: The global meltdown led to a 52% drop in Sensex.
• 2015 Chinese Yuan Devaluation: Concerns about slowing Chinese growth triggered a 22% fall.
• 2016: Demonetisation in India & Brexit: The demonetization shock to businesses and cash flow, coupled with global uncertainty caused by news of Brexit, led to the Sensex crashing by 1,689 points and 605 points, respectively. 
• 2020 COVID-19 Pandemic: The initial lockdown fears caused a 38% plunge in Sensex.
• Advantages & Disadvantages of Investing in Sensex
• Benefits of Diversified Exposure to Leading Companies
• When you invest in Sensex, you’re not putting money in just one stock. You’re spreading it across 30 top companies. This helps reduce risk. Even if one company doesn’t do well, others might balance it out. This is a basic example of what is Sensex all about: diversification across major companies.
• Understanding Market Volatility and Associated Risks
• The market can fluctuate rapidly. Global events, political changes, or inflation can affect Sensex. As an investor, you must be ready for ups and downs.
• Long-Term Growth Potential of Sensex Investments
• Despite short-term ups and downs, Sensex has shown strong long-term growth. If you stay invested for years, you’re more likely to see good returns.Learning what is Sensex helps you better prepare for long-term investing.

Conclusion

Understanding the Sensex is an essential aspect of investing in the Indian stock market. As the snapshot of Sensex India health, it is a ready reckoner for the performance of the top 30 stocks and broadly of the economy’s overall health. Thus, understanding and interpreting the Sensex helps make investment decisions.

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Final Words

So, what is Sensex? It’s a reliable way to track India’s top-performing companies. Whether you’re a beginner or a regular investor, the Sensex gives you a quick view of the stock market. Now that you know how sensex is calculated and how to invest in it, you can make more informed decisions.

Investing doesn’t have to be scary. Start small, stay consistent, and keep learning.