What is Sensex?
Sensex was launched in 1986 and its base year refers to April 01st 1979. What exactly is this Sensex, which has emerged as a barometer of the Indian stock market performance as well as a signal of the health of the Indian economy? Check out the 1 year Sensex chart below:
Data Source: BSE
What is the Sensex all about?
The Sensex is an abridged version of “Sensitive Index”. The Sensex is the benchmark index of Bombay Stock Exchange (BSE), designed to reflect the overall market sentiments and comprises of 30 most liquid and representative stocks in the market. This composition of Sensex keeps changing over time with the changing importance in the markets. For example, when the Sensex was set up in 1979, there was not a single bank or IT company in it. Today, banks and IT account for nearly 50% weightage in the Sensex. In a way, the Sensex also reflects the changing times because only 10 of the stocks that were there in the original Sensex of 1979 are still there in the index as of today.
How is the Sensex calculated?
First, it needs to be understood that the Sensex adopts a market capitalisation weighted approach in which weights are assigned according to the size of the company. So a company with a larger market cap will have a higher weightage in the Sensex. The second aspect of the Sensex is that it is free-float weighted. Free float is the total number of shares available for the public to trade in the market and excludes shares held by promoters, governments or trusts, FDIs, among others. For example, Reliance will have a higher weightage because of its free float compared to TCS where majority shares are held by Tata Sons. Similarly, ITC gets a bigger weightage than Hindustan Unilever due to bigger free float.
Sensex is always calculated with reference to 1979 value = 100
The total value of shares in the Sensex is assumed to be “100” in the base year (1979) and any Sensex value that you see is with reference to this base value of 100. So, if the Sensex is quoting at 39,000 today then your investment in the Sensex portfolio has appreciated by 390 times over 40 years. In other words, an investment of Rs.1 lakh in the Sensex in 1979 is worth Rs.3.90 crore today; an annual CAGR return of 17%.
Finally, how are stocks selected in the Sensex? That is left to a specialized index committee. They consider factors like market capitalization, growth, profitability, sector importance, contribution to GDP, among others. The 30-stock Sensex is a fairly good representation of the market sentiments and the Indian economy overall.
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