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Sensex has been grabbing headlines this year as it attains new peaks amid a bullish market sentiment in India. Whether tuning in to news channels, engaging in discussions with friends actively involved in stock investments, or simply browsing the internet, mentions of Sensex, such as reports on market crashes or its daily point increments, have become commonplace. It stands out as a closely monitored index globally.
It captures the attention of domestic and international investors, policymakers, and the media. Observers often interpret its fluctuations as a barometer reflecting India’s broader economic and political trends. Hence, the question arises: What is Sensex? What is the significance of Sensex? What do the points in Sensex indicate?
What is Sensex?
Do you know what is Sensex? Originally intended to represent the premier market index, Sensex comprises 30 companies enlisted on the Bombay Stock Exchange. Today, the constituent companies within this index rank among the largest in the country, boasting stocks that are actively traded. The selection of companies included in Sensex is meticulously carried out by the S&P BSE Index Committee, employing a set of five criteria for evaluation.
Companies seeking inclusion must be listed on the Bombay Stock Exchange in India.
- It is required to comprise mega or large-cap stocks.
- The included stocks must exhibit a relative degree of liquidity.
- Earnings generation from the core activities is a prerequisite for eligibility.
- Companies must play a role in maintaining balance within the sector concerning the country’s equity market.
Since its inception in the 1990s, this Sensex index fund has experienced significant growth, particularly after 2000. Notably, in 2002, the participation of information technology firms propelled the index to surpass the 6000 milestone initially. This upward trajectory can be attributed to the increase in India’s Gross Domestic Product (GDP) at the beginning of the 21st century.
Some noteworthy companies included in this Sensex index fund are Asian Paints, Axis Bank, Bajaj Finance, Coal India, Bharti Airtel, HCL Technologies, ICICI Bank, Hindustan Unilever, IndusInd Bank, Larsen & Toubro, Tata Consultancy Services, and more.
Benefits of Sensex
The following are the benefits: –
- Better visibility – Better visibility and increased trustworthiness are two benefits of Sensex for businesses. Consequently, it exploits the same value and raises demand for its shares.
- Enhanced prestige – Since it includes the top-performing businesses, which is essential to their reputation, it even raises the firms’ status.
- Easy access to capital – It enables a business to raise funds for its shares.
- Encourages SME growth – Sensex provides expansion, acquisition, and merger opportunities.
- Enhances the liquidity of equity holders – It also increases the liquidity for the owners. It provides them with various expansion, acquisition, and merger prospects.
How does the Sensex work?
The S&P BSE Sensex index, commonly called the Sensex or Sensex Index, is a benchmark for 30 of India’s most significant and highly liquid publicly traded companies. These companies, constituting the Sensex, are selected from the BSE, a fundamental stock market in India. Globally, many investors rely on the Sensex futures as an indicator of the overall health of the Indian economy, which has experienced substantial growth in recent decades.
How is the Sensex calculated?
The Sensex is computed through the free-float capitalisation method, which shares similarities with the market-capitalisation weighting approach. In this method, companies receive weights based on their proportion of the index’s total market capitalisation. Consequently, Sensex futures emphasises the most prominent companies included in the index. However, unlike the market-capitalisation method, the free-float capitalisation method considers only shares that are available for trading, excluding restricted shares or those held by company insiders.
Factors affecting the calculation
The computation of the Sensex is influenced by various factors, encompassing the market capitalisation of the 30 constituent companies and fluctuations in stock prices. Furthermore, changes in the number of outstanding shares resulting from bonus issues, stock splits, mergers, and acquisitions also play a role.
The BSE Index Committee conducts periodic reviews of the Sensex’s composition, implementing changes based on diverse criteria. These criteria include market capitalisation, liquidity, trading frequency, and sector representation.
The formula used to calculate the Sensex is expressed as follows:
|Sensex = (Total free-float market capitalisation of 30 companies / Index Divisor) x Base Value
- Free-Float market capitalisation: The aggregate of the free-float market capitalisation of the 30 companies included in the index.
- Index divisor: A numerical factor employed to adjust the index for variations in the number of outstanding shares, accounting for factors such as bonus issues, stock splits, mergers, and acquisitions.
- Base value: The initial value of the Sensex on the base date of January 1, 1979, set at 100.
How do Sensex constituents get decided?
Every stock undergoes meticulous due diligence before being incorporated into the Sensex, guaranteeing that only stocks of exceptional quality are included in this index. To be considered for addition to the Sensex, companies must satisfy the following five criteria:
- Listing on the Bombay Stock Exchange (BSE): A firm must be listed on the BSE to be eligible for the Sensex. It cannot be a part of the Sensex if it is not listed on the BSE.
- Large or mid-sized market capitalisation: A firm must have a large-to-mid-sized market capitalisation to be eligible for inclusion in the Sensex. This criterion guarantees that this index contains only the most prominent corporations.
- High liquidity of shares: A stock must be liquid to be considered in the Sensex. This indicates that purchasing and selling of the specific stock should be simple.
- Substantial revenue from core activities: Businesses that want to be listed on the Sensex must have a sizable revenue stream from their primary lines of operation. For example, Bharti Airtel and Sun Pharma are two corporations whose primary activities may generate significant income.
- Sector weight of the company: Sustaining the equilibrium of sectors is an additional imperative. Every sector in an index is given a certain weight that indicates how much of an influence it has on the economy as a whole.
How are 30 companies selected in Sensex?
Certain key criteria employed in the selection of the 30 stocks forming the Sensex include:
- Listing on BSE is a prerequisite.
- Stocks must be categorised as large or mega-cap, with large-cap encompassing companies with market capitalisation between Rs. 7,000-20,000 crores and mega-cap including those with a market capitalisation exceeding Rs. 20,000 crores.
- Preference is given to stocks that exhibit relative liquidity.
- The company’s revenue should primarily derive from its core activities.
- Companies should demonstrate a diversified and well-balanced sector focus aligned with the dynamics of the Indian equity market.
How to trade in Sensex options?
Sensex options trading are financial agreements providing you the authority to buy or sell the Sensex index at a pre-established price on or before a specified date. Picture it as a pass that empowers you to choose whether you wish to participate in the Sensex event at a fixed price or opt out entirely. Here’s how to trade in Sensex options:
If you hold stocks from the Sensex, and you opt to sell call options against those stocks, it implies that you are granting someone else the privilege to purchase your shares at a predetermined price (the strike price) before a designated date (the expiration date).
To buy and sell stocks on the BSE and NSE, one needs to refer to the Sensex and Nifty. Various indices provide a synopsis of stock performance based on industry, company size, and other factors. The Sensex Index is a valuable tool for gauging investor sentiments, facilitating quicker stock selection, and enhancing the convenience of passive trading. “Sensex Today” represents the current measurement of the Sensex index on a specific date, with its value being a dynamic and variable parameter.
SENSEX is an acronym for the Stock Exchange Sensitive Index and is widely recognised as the BSE (Bombay Stock Exchange), India’s oldest stock exchange. It is a free-floating, economy-weighted index comprising 30 robust and well-established companies listed on the BSE.
The Sensex serves as an indicator of market sentiment and the nation’s economy. Imagine this indicator as a mutual fund comprising 30 businesses with diverse weights. The values of these companies are in constant flux, directly influencing the Sensex. If the prices of the majority of these companies increase, the index will also experience a rise; conversely, if they decline, the index will follow suit.
There are two approaches to investing in the Sensex:
Acquire stocks in the 30 companies in the same proportion as their respective Sensex weightage.
Opt for investment in Index Mutual Funds that mirror the weightages of the Sensex companies