All About BSE Sensex

BSE Sensex stands as a barometer of India’s stock market health and economic performance. The term ‘Sensex’ is a blend of ‘Sensitive’ and ‘Index’ and was coined by the stock market expert Deepak Mohoni.  This article discusses BSE Sensex in depth, evaluating its significance and methodology. We also explain the differences between Sensex and Nifty.

What Is The BSE Sensex?

BSE Sensex, short for the Bombay Stock Exchange Sensitive Index, is India's oldest and most prominent stock market index. It serves as a benchmark indicator for the performance of the Indian equity market. The Sensex is a weighted index that tracks the stock prices of a select group of companies listed on the Bombay Stock Exchange (BSE), one of India's major stock exchanges.

Introduced by the BSE in 1986, the Sensex initially comprised 30 financially sound and well-established companies across various sectors of the Indian economy. Over time, the Sensex has evolved, reflecting changes in market dynamics and economic trends.

How Is Sensex Calculated?

The calculation process of the Sensex involves several steps:

• The market capitalisations of all 30 companies listed in the index are determined.
• Free Float market capitalisation for each of these 30 companies is computed.
• Free Float market capitalisations of all these companies are then aggregated to obtain a total value.
• Using a specific formula, the Sensex value is calculated. The formula is Sensex = (total free-float market capitalisation/base market capitalisation) * Base index value.
• The base year for Sensex calculation is set as 1978-79, with a static base value. However, it's important to note that the base market capitalisation needs to be updated. The Bombay Stock Exchange (BSE) specifies using Rs. 2501.24 crore as the current base market capitalisation.
• The initial or base index value is set at 100.
• Therefore, the Sensex formula is represented as Sensex = (Free-Float Market Capitalisation of 30 companies / 2501.24 crores) * 100.

How To Invest In Sensex?

Index Funds

One of the simplest ways to invest in the Sensex is through index funds. These mutual funds are designed to replicate the performance of the Sensex by investing in the same stocks that constitute the index. Investors can buy units of these funds through a mutual fund distributor or an online platform.

Exchange-traded funds (ETFs)

ETFs are similar to index funds but are traded on stock exchanges like individual stocks. ETFs that track the Sensex are available for purchase on stock exchanges. Investors can buy and sell these ETFs during market hours through a brokerage account.

Sensex Futures and Options

Experienced traders and investors can participate in Sensex futures and options traded on derivative exchanges. These financial instruments allow investors to speculate on the future price movements of the Sensex. Futures and options contracts are available for trading on recognised exchanges and require knowledge of derivative markets.

Direct Equity Investments

Investors can also directly invest in the individual stocks that comprise the Sensex. However, this approach requires thorough research, an understanding of the stock market, and the ability to diversify across multiple stocks to manage risk effectively.

Systematic Investment Plan (SIP)

For mutual fund investments tracking the Sensex, investors can opt for a SIP, which allows them to invest a fixed amount regularly at predefined intervals. SIPs help in rupee-cost averaging and can be a convenient way to invest in the Sensex over the long term.

How Is Sensex Different From Nifty?

There are several significant differences between Sensex and Nifty:

Stock Exchange: The Sensex is associated with the Bombay Stock Exchange (BSE), while the Nifty is associated with the National Stock Exchange (NSE).

Number of Stocks: The Sensex comprises 30 actively traded stocks, representing various sectors listed on the BSE. In contrast, the Nifty consists of 50 stocks selected from different sectors listed on the NSE.

Selection Criteria: The constituents of both the Sensex and the Nifty are chosen based on factors like market capitalisation, liquidity, and sectoral representation.

Calculation Methodology: The Sensex is calculated using the free-float market capitalisation of its 30 constituent stocks, whereas the Nifty uses the same method for its 50 constituent stocks.

Weightage and Sectoral Representation: The Sensex gives more weight to older and larger companies, while the Nifty includes a broader representation across different market segments and sectors, providing a more diversified view of the market.

Conclusion

BSE Sensex holds immense significance as a pivotal indicator of the Indian stock market's performance. Its methodology, composition, and historical movements reflect the economy's pulse, guiding investors, policymakers, and market analysts.