Sensex

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What is Sensex?

What is Sensex?

It is a portmanteau of two terms- Sensitive and Index and was coined by Deepak Mohoni, a stock market expert. Sensex was meant to denote the most popular market index of 30 companies listed under Bombay Stock Exchange. The component companies listed in this index today are some of the biggest companies in this country with the most actively traded stocks.

Companies included under it are selected by S&P BSE Index Committee based on the following five criteria –

Companies have to be listed under Bombay Stock Exchange in India.
It must consist of large or mega-cap stocks.
It has to be relatively liquid.
It must generate earnings from core activities.
Companies must contribute to keep the sector balanced with the country’s equity market.

Ever since opening up in the 1990s, it has witnessed rapid growth, especially post 2000. For instance, in 2002, information technology companies helped the index cross 6000 marks for the first time. From then onwards, Sensex grew by leaps and bounds and closed at 39,056.65 on 2nd April 2019, crossing 39,000 points for the first time.

This growth curve can be owed to a rapid increase in India’s Gross Domestic Product (GDP), since the turn of this century.

Companies under this Index

Some of the companies under this index include Axis Bank, Asian Paints, Bajaj Finance, Bharti Airtel, Coal India, HCL Technologies, Hindustan Unilever, ICICI Bank, IndusInd Bank, Tata Consultancy Services, Larsen &Toubro, etc.

How is it Calculated?

BSE modifies Sensex share composition from time to time to ensure that it reflects the current conditions of the stock market. At first, the index was calculated based on the weighted methodology of market capitalisation. However, since 2003, this calculation method was reformed and now integrates a free-float capitalization method.

This free-float method is an alternative of the market-capitalisation method, where instead of a company’s outstanding shares, the number of shares available for sale under it is used to calculate the index. This method, thus, does not integrate restricted stocks (ones held by company insiders) which are not for sale.

To get free-float capitalisation, a company’s market capitalization (outstanding shares X share price) is multiplied with its free-float factor. This factor is the ratio of floated shares to outstanding ones.

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According to this free-float capitalisation method, the index level always demonstrates free-float value of the 30 listed companies under Sensex, relative to a base period.

Milestones of Sensex India (1990-2019)

The following table illustrates the gradual rise (and fall) of Sensex stock through India’s stock market history –

Timeline	Events
Early 90’s to the end of the 20th century	Ever since its integration, Sensex touched 1000 on 25th July 1990 and closed at 1001. 1991 saw the introduction of various liberal economic policies which led to Sensex index crossing 2000, for the first time in 1992. In 1992, Harshad Mehta scam led to unabated selling in Sensex share. In 1999, the index crossed 5000 point mark for the first time, ushering in the new century.
Beginning of the 21st century to mid-2000s.	Onset of the 21st century brought a boom in the market of thanks to IT, which pushed the index to hit 6006 points. This record was held until 4 years, till 2nd Jan 2004, when shares hit 6026.59 points. In 2005, Sensex crossed 7000 points for the first time, owing to settlement in the Ambani family, which led to insurmountable gains for the Reliance Group of companies. Between June and December 2005, this index witnessed rapid growth and crossed 9000 points, owing to brisk purchasing from foreign institutional investors, as well as several domestic funds.
Mid 2000s to its end.	On 7th February 2006, this index, during mid-session touched a high of 10,003 points. The period between 2006 and 2007 saw a leap in Sensex index growth due to aggressive purchase of funds. It jumped from 10,000 to 20,000 points in December 2007. The period between 2008 and 2010 saw market fluctuations with stock market crash and its steady recovery. It was on November 5th, 2010 that it closed at 21004.96 points, crossing 21,000 points.
2013-2015	In October 2013, Sensex India closed at 21,033.97 points, ushering in a new high for the index. In 2014, its closing stocks were higher than the Hang Seng Index, leading it to become Asia’s highest value stock market index. It also witnessed a rapid increase from 21,000 points to 28,000 in the same year, breaking the 600 point record set in year 2007. On the 23rd of January 2015, this share index closed at 29,278 points, putting it at a new high. Next, owing to repo rate cuts by RBI, the index crossed 30,000 points for the first time.
2017-2019	From 2017 to 2018, this index grew steadily to cross 38,000 points. On 23rd May 2019, Sensex breached its 40,000 mark for the first time.

Therefore, in the past 3 decades, even though India’s stock market has undergone bullish and bearish trends, the outcome has overall been positive for investors with a steady growth of Sensex.

Major Plunges in Sensex Stocks

The world economy faced a major crisis between 2008 and 2009 with a fall in the Dow Jones industrial average in its intraday trading, leading to a stock market crash. This crash also affected India’s stock market adversely and led to a loss of 1408 points on 21st January 2008, which was its highest since its inception. The next day the index went into a downward spiral with trading suspended for an hour.

From January to November 2008, the index continued to drop consistently, throwing the entire market into uncertainty. In October 2008, the market closed at 8509.56 points; it’s lowest in the last 10 years.

Again, in 2009, the index dropped by almost 750 points due to the Satyam fraud, which threw the market into turmoil.

However, even with numerous fluctuations and major plunges in the last 30 years, Sensex India has managed to uphold its position as the leading stock index in the country of late. For present and future investors, now is the best time to start investing in equity-related investments such as Large-cap stocks.