How Does The Indian Sensex Function

SENSEX Definition

SENSEX is the short for ‘Sensitive Index’, is the benchmark index of BSE. SENSEX represents the aggregate market value of 30 well performing companies that are listed on Bombay Stock Exchange. These companies are most frequently traded equity stocks.  These 30 stocks will be updated based on their performance in BSE.

Short Note on SENSEX

SENSEX depicts the performance of the Indian Economy. Hence, the investors are involved in equity trading based upon the SENSEX movements. Any downtrend in SENSEX , will ultimately lead to loss of investors’ confidence in the Indian Stock Market. Overall, SENSEX movements will indicate industry specific development, economic growth, performance of Indian stock market etc...

Understanding the Sensex

Several key factors determine the selection of the 30 stocks comprising the Sensex:

• Should be listed on the BSE

• Considers large-cap or mega-cap, with market capitalization between Rs. 7000 crores and Rs. 20,000 crores for large caps, and exceeding Rs. 20,000 crores for mega caps

• Stocks should be highly liquid

• Primary revenue source should be operational

• Diversified sector concentration, mirroring the Indian equities market

Function of SENSEX

The BSE Sensex monitors the performance of 30 of the largest and most actively traded companies listed on the Bombay Stock Exchange (BSE) in India. It provides a snapshot of the stock market's performance and serves as a benchmark for overall market performance. Changes in the Sensex are influenced by factors such as economic growth, government policies, and global events.

How is the SENSEX calculated?

Previously, the Sensex was calculated using the weighted market capitalization method. However, since September 1st, 2003, the BSE Sensex value has been calculated using the Free Float Market Capitalization method. Here's how it's done:

1. Selection of 30 companies that form the index.

2. Calculation of Free Float Market Capitalization:

Free Float Market Capitalization = Market Capitalization * Free Float Factor.

Market capitalization = Share price per share * number of shares issued by the company.

The Free Float Factor represents the percentage of total shares issued by a company available for public trading. It excludes shares held by promoters, the government, etc., which are not publicly traded.

3. Calculation of BSE Sensex:

Value of Sensex = (Total Free Float Market Capitalization / Base Market Capitalization) * Base Period Index Value.

The base period (year) used is 1978-79, with a base value of 100 index points.

Importance Of SENSEX and NIFTY

The SENSEX and NIFTY are two of India's most prominent stock market indices, each playing a vital role in the Indian financial landscape. Here's a breakdown of their importance:

1. Benchmark for Market Performance: Both indices serve as benchmarks for the overall performance of the Indian stock market. They provide a reference point for investors to assess the performance of their portfolios against the broader market.

2. Indicator of Economic Health: The movements of the SENSEX and NIFTY are often seen as indicators of the country's economic health. Rising indices may signify economic growth, while falling indices may indicate economic challenges.

3. Investment Decision Making: Investors and fund managers use these indices to make investment decisions. They help in identifying trends, assessing market sentiment, and allocating resources effectively.

4. Global Recognition: The SENSEX and NIFTY have gained global recognition and are closely watched by international investors and financial institutions. They provide insights into the Indian market's attractiveness for foreign investments.

5. Sectoral Representation: Both indices cover a wide range of sectors, providing a diversified view of the market. This sectoral representation helps in understanding the performance of different industries within the economy.

6. Market Liquidity: Stocks included in these indices are generally highly liquid, making them attractive to investors looking for easily tradable assets.

Functions of NSE and BSE

The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the two main stock exchanges in India. They play a crucial role in the functioning of the Indian capital markets. Here are their key functions:

1. Facilitate Trading: Both exchanges provide a platform for buying and selling of securities such as stocks, bonds, and derivatives. They ensure fair and transparent trading practices.

2. Price Discovery: BSE and NSE help in determining the prices of securities through the forces of supply and demand. This price discovery mechanism is crucial for efficient capital allocation.

3. Listing of Securities: Companies can list their securities on the exchanges to raise capital from the public. BSE and NSE have listing requirements that companies must meet to be listed.

4. Market Surveillance: They monitor trading activities to prevent market manipulation, insider trading, and other malpractices. This helps in maintaining market integrity.

5. Investor Protection: BSE and NSE implement various investor protection measures, such as ensuring transparency in trading, providing investor education, and resolving investor grievances.

6. Derivatives Trading: Both exchanges offer trading in derivative products such as futures and options, which allow investors to hedge risk or speculate on price movements.

7. Index Calculation: BSE calculates the SENSEX, while NSE calculates the NIFTY, which are key benchmark indices reflecting the overall market performance.

8. Market Data Dissemination: They provide market data, including prices, trading volumes, and other relevant information, to market participants, investors, and the general public.

9. Regulatory Compliance: BSE and NSE comply with regulations set by the Securities and Exchange Board of India (SEBI), the regulatory body overseeing the securities market in India.

Frequently Asked Questions

Importance of the Index

There are many aspects like news about the company or country, major acquisitions, and company performances that drive the movement of the Indian Sensex. The Sensex India is important for many reasons. A few reasons can be stated as:

 

They function as standards of comparison for equity funds and other investments.

They indicate the returns on money invested in the stock market.

They can be used for historical comparison of these against other investment forms such as crude oil.

It is measured as a major indicator of the performance of the share market and accordingly the country’s economy too.

How is the Sensex Calculated?

The Sensex is calculated using the free-float market capitalization method. This means that only the shares available for trading in the market are considered for calculating the index, rather than all outstanding shares. 

How is the Sensex Calculated in Real-Time?

The Sensex is calculated every second during market hours based on the real-time prices of the 30 index stocks. Changes in the stock prices lead to fluctuations in the Sensex value throughout the trading day.

What Factors Influence the Sensex?

Several factors can influence the movement of the Sensex, including macroeconomic indicators (such as GDP growth, inflation, and interest rates), corporate earnings, global market trends, government policies, and geopolitical events.

What is the Significance of the Sensex?

The Sensex is widely regarded as a barometer of the Indian stock market's overall performance. It is used by investors, analysts, and policymakers to gauge the market sentiment, investment trends, and economic health of the country.