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What is Sensex-Definition, Formula & Benefits

What is Sensex-Definition, Formula & Benefits
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If I were to ask you to give me a real-time summary of the restaurants that serve the best Indian food, how would you do it? 

The wise thing would be to get handy of some of the articles that extensively talks about the best Indian cuisine restaurants or ask your dear and near ones. Drawing parallels, if I were to ask you how the stock market is moving today, it would be very difficult for you to give an answer since you have to do proper research about the listed companies. So what do we do? 

This is where sensex enters in the picture. It is the most widely tracked indices in the world. Watched by domestic and international investors, as well as policymakers and the media. Its movements are often seen as a reflection of the broader economic and political trends in India.

Let’s dive deep into the blog, to know more about what is sensex, sensex price, sensex highest in history, calculation & formula and much more. 

What is Sensex? 

Sensex meaning is a stock market index that comprises the 30 largest and most actively traded stocks on the Bombay Stock Exchange (BSE). It is often considered to be the benchmark index for the Indian equity market.

The sensex history dates back to 1986. It is the oldest stock index fund in India and is operated by Standard & Poor’s (S&P). Over the years, it has become an important barometer of the Indian stock market, reflecting the performance of some of the country’s most successful and influential companies. It has undergone several changes since its inception, including revisions to its constituent companies and the methodology used to calculate it.

Therefore, it is a crucial indicator of the health of the Indian economy and the overall performance of its stock market. It provides a snapshot of investor sentiment towards Indian companies and the economy as a whole, making it an essential tool for investors and analysts alike. The Sensex, which is one of the most widely tracked indices in the world, closely watches by domestic and international investors, as well as policymakers and the media. Many people often see its movements as a reflection of the broader economic and political trends in India.

How Sensex is Calculated? 

Sensex, also known as the S&P BSE Sensex, is an index of the Bombay Stock Exchange (BSE), which is a benchmark index of the Indian equity market. It represents the performance of the top 30 companies listed on the BSE, based on market capitalization. Here’s how the Sensex is calculated:

Methodology of Calculation:

The calculation of the Sensex involves taking into account the free-float market capitalization of the 30 companies that are part of the index. The free-float methodology takes into account only the shares that are available for trading in the market and excludes the shares held by promoters, governments, and strategic investors.

It is calculated using a market capitalization-weighted methodology. This means that the weightage of each share in the index is proportional to its free-float market capitalization. 

The formula for calculating the Sensex is:

Sensex = (Total free-float market capitalization of 30 companies / Index Divisor) x Base Value

Factors Affecting the Calculation

Several factors affect the calculation of the Sensex. Including the market capitalization of the 30 companies that constitute the index and changes in the prices of the stocks. Additionally, alterations in the number of outstanding shares due to bonus issues, stock splits, and mergers and acquisitions.

The Index Committee of the BSE periodically reviews its composition and makes changes based on various criteria. Such as market capitalization, liquidity, trading frequency, and sector representation.

Sensex Formula

The formula for calculating the Sensex is as follows:

Sensex = (Total free-float market capitalization of 30 companies / Index Divisor) x Base Value

where:

  • Free-Float Market Capitalization: The sum of the free-float market capitalization of the 30 companies that are part of the index.
  • Index Divisor: A number that is used to adjust the index for changes in the number of shares outstanding. Dependent factors are bonus issues, stock splits, and mergers and acquisitions.
  • Base Value: The value of the Sensex on the base date of January 1, 1979, which was set at 100.

What is Nifty and Sensex?

Sensex and Nifty are both benchmark indices of the Indian stock market. The Sensex, also known as the S&P BSE Sensex, is an index of the Bombay Stock Exchange (BSE). However, the Nifty, also known as the Nifty 50, is an index of the National Stock Exchange (NSE). Both indices are used to represent the performance of the Indian equity market. Thus, they are closely watched by investors, traders, and analysts.

Let’s review some of the key differences between the both.

Basis of ComparisonSensexNifty
DefinitionSensex, also known as the S&P BSE Sensex, is an index of the Bombay Stock Exchange (BSE), which is a benchmark index of the Indian equity market. It represents the performance of the top 30 companies listed on the BSE, based on market capitalization.Nifty, also known as the Nifty 50, is an index of the National Stock Exchange (NSE), which is also a benchmark index of the Indian equity market. It represents the performance of the top 50 companies listed on the NSE, based on market capitalization.
ExchangeBombay Stock Exchange (BSE)National Stock Exchange (NSE)
Number of Companies3050
Calculation MethodMarket capitalization-weighted methodologyFree-float market capitalization-weighted methodology
Base DateJanuary 1, 1979November 3, 1995
Base Value1001,000
WeightageProportional to free-float market capitalizationProportional to free-float market capitalization
SectorsCovers a broad range of sectorsCovers a broad range of sectors
ReviewReviewed periodically by the Index Committee of the BSEReviewed periodically by the Index Committee of the NSE

How to Invest in Sensex via smallcase? 

smallcase is a platform that allows investors to invest in a diversified portfolio of stocks and Exchange Traded Funds (ETFs) based on various themes or strategies. Here are the steps to invest in a Sensex-based smallcase:

  • Open an demat account online with a broker that supports smallcase. Some popular brokers that support smallcase are Zerodha, HDFC Securities, and ICICI Direct.
  • Log in to your smallcase account using your broker credentials.
  • Browse and select the Sensex-based smallcase that you want to invest in. You can filter the smallcases based on the theme, returns, and other parameters.
  • Once you have selected the smallcase, you can see its details, including the stocks and ETFs it comprises, its performance history, and its allocation.
  • You can invest in the smallcase by choosing the amount you want to invest and placing an order. smallcase will allocate the amount to the constituent stocks and ETFs based on their weightage.
  • Once you have invested, you can monitor your investment and track its performance using the smallcase dashboard.

(Note: It’s important to do your own research and analysis before investing in a smallcase or any other investment product. Also, past performance is not indicative of future results.)

What are the Components of Sensex?

The Sensex is composed of the following components:

  • Number of Companies in Sensex: Consists of 30 companies listed on the Bombay Stock Exchange (BSE).
  • Industry Sectors Represented in Sensex: Represents a broad range of sectors, including banking and finance, energy, information technology, pharmaceuticals, and consumer goods.
  • Examples of Companies Listed in Sensex: Companies listed in the Sensex are Reliance Industries, HDFC Bank, Infosys, Tata Consultancy Services, ICICI Bank, Larsen & Toubro, Hindustan Unilever, Kotak Mahindra Bank, and State Bank of India.

What are the Factors Affecting Sensex? 

It is influenced by a range of factors and we have grouped them into three different categories. Let’s have a look. 

1. Macroeconomic Factors

  • Interest Rates: Changes in interest rates can affect the borrowing costs of companies, which can impact their earnings and the overall market sentiment. Resulting in changes in the sensex points and price.
  • Inflation: High inflation can lead to an increase in input costs, which can impact the profitability of companies. In turn, affect the sensex points and price.
  • Foreign Exchange Rates: Changes in exchange rates can impact the exports and imports of companies. Thus, this can have an impact on their earnings and the sensex price and points.

2. Industry-Specific Factors

  • Technological Advancements: Technological advancements can impact the competitiveness and growth prospects of companies. Especially in sectors such as IT and telecom, which can affect the sensex points and price.
  • Regulatory Changes: Changes in regulations, such as taxation and environmental norms, can impact the operations and profitability of companies. Thus, this can affect the sensex points and price.
  • Mergers and Acquisitions: Mergers and acquisitions can impact the competitive landscape of industries and the financial performance of companies, leading to changes in the sensex points and price.

3. Company-Specific Factors

  • Financial Performance: The financial performance of individual companies, such as revenue, earnings, and profit margins, can impact their stock prices, which can influence the sensex price and points.
  • Management Changes: Changes in management, such as the appointment of a new CEO, can impact the strategic direction and performance of companies, which can affect their stock prices and the sensex price and points.
  • Market Share and Competition: Changes in market share and competitive dynamics within industries can impact the earnings and growth prospects of companies, which can affect their stock prices and the sensex points and price.

What are the Benefits of Sensex? 

The Sensex, as a benchmark index of the Indian stock market, has several benefits, including:

  • Measure of the Health of the Indian Economy: It is often used as a barometer of the health of the Indian economy. Comprises the stocks of the top 30 companies across various industries, any significant movements in the sensex price and points can indicate the performance of the broader economy.
  • Tool for investment Decision-Making: It can also be used as a tool for investment decision-making. You can use the Sensex as a reference point to evaluate the performance of the portfolio and compare it to the broader market. Additionally, you can use Sensex to identify trends and opportunities in various sectors and make informed investment decisions.
  • Source of Information on the Performance of Companies and Industries: It provides information on the performance of the constituent companies and industries. You can analyze the performance of individual companies and industries by identifying their strengths, weaknesses, and growth prospects.

What are the Risks Associated with Sensex? 

Investing in the Sensex or any stock market carries certain risks, including:

  • Volatility of the Stock Market: It is subjected to market volatility, which means that its price and points can fluctuate significantly in response to various factors such as news, events, and market sentiment. This can lead to sudden and unexpected losses for investors.
  • Market Manipulation: The stock market can also be subject to manipulation by certain market players, such as insider trading or rumors, which can distort stock prices and affect the sensex points and price.
  • External Factors: It can also be impacted by external factors such as political instability, changes in government policies, natural disasters, or global economic events such as recessions or currency fluctuations. These factors can impact the stock market and the sensex price and points.

To Sum it Up….

In conclusion, the sensex is an important tool for investors and serves as a barometer of the Indian economy. However, investing in the Sensex or any stock market involves certain risks, such as market volatility, market manipulation, and external factors affecting the stock market. But with a trustable platform like smallcase you can easily mitigate these challenges via portfolio management and investing

smallcase provides a convenient and cost-effective way for investors to gain exposure to some of India’s top-performing companies. By diversifying across multiple sectors and companies, you can mitigate some of the risks associated with investing in individual stocks. 

However, as with any investment, it’s important to carefully evaluate your risk tolerance, investment objectives, and to conduct your own research and analysis before making any investment decisions. With the right approach and a long-term perspective, investing in the sensex through smallcase can be a smart and rewarding investment strategy.

Start investing in smallcase way today!