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 –

1. Companies have to be listed under Bombay Stock Exchange in India.
2. It must consist of large or mega-cap stocks.
3. It has to be relatively liquid.
4. It must generate earnings from core activities.
5. 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.

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 –

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.