What is sensex and, how sensex is calculated?

Economics 15 May 2021 1:40:PM

What-is-SENSEX_(1) What-is-SENSEX_(1)

The Journey Of Sensex

What is the SENSEX?

The 30 stock sensitive index (popularly known as Sensex) was first piled up in 1986. The Sensex is compiled based on the performance of the stocks of 30 financially sound companies.

In the year 1990, the BSE crossed the 1000 mark for the 1st time. It crossed 2000, 3000 and 4000 marks in 1992.

The base year of sensex:

The base value of the Sensex is taken as 100 on 1 April 1979, and its base year is 1978-79.

How is the SENSEX index computed?

The computation method is based on the free-float market cap of the companies (this does not include promoter holdings).

What does the SENSEX currently comprise?

SENSEX has a variety of sectors in it – Finance (43.32%), IT (17.12%), Oil & Gas (13.31%), FMCG (7.94%), Transport Equipment (4.06%), Capital Goods (3.25%), Telecom (2.49%), Healthcare (2.2%), Power (1.99%), Chemical (1.91%), Housing Related (1.32%) and Consumer Durables (1.09%).

Clearly, from the above, we can infer that FINANCE is a major contributor to the index.

What are the top stocks that comprise the Sensex index?

Reliance Industries, HDFC Bank, Infosys, HDFC Ltd., ICICI Bank, TCS, Kotak Mahindra Bank, Axis Bank, HUL, ITC Ltd. In that particular order are the top contributors to the index currently.

How has SENSEX changed over the period of time?

The Bombay Stock Exchange selects stocks in the Sensex based on criteria such as regular trading and the company being in the top 75 based on free-float market capitalization.

Castrol India, NIIT, GlaxoSmithKline Pharmaceuticals, Colgate Palmolive, and Nestle (India) which were once part of the Sensex are out of it now. Instead, we now have HDFC, HDFC Bank, Tata Steel, etc.

The index itself has become more diversified. The top three stocks by weights in Sensex in 2002 were Hindustan Unilever, Reliance Industries, and Infosys with a total weight of 45 percent. 

If the incoming stocks carry a high weight (based on free-float market capitalization), existing stocks in the index to witness some selling pressure, as they ‘adjust' to make room for the new entrant.

Macro factors such as the index of industrial production, growth/decline in core sectors, and Reserve Bank of India's interest rate action have become key factors driving the Sensex in recent years.

How can one invest in the SENSEX?

Through SENSEX ETF’s an investor can invest in the SENSEX as the ETF will track the movements of the underlying index. Through this passive investment strategy, investors can avail of portfolio diversification and returns linked to the index.

Weights are continually adjusted for the market cap, so as the strong keep getting stronger, the index adjusts accordingly.

What returns can one expect?

Sensex, which has been a barometer for the Indian economy, has given 17%+ returns over the last 40 years.

Are you an investor? Or want to start investing? then visit here to get your free Demat account to start investing in the best stocks.

Source – BSE Sensex Methodology, BSE Website, BSE S&P fact Sheet.  

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