Understanding the Sensex Index

Table of Contents

I. Introduction to the Sensex Index

The Sensex, also known as the S&P BSE Sensex, is the benchmark index of the Indian stock market. It represents the performance of the top 30 companies listed on the Bombay Stock Exchange (BSE) based on market capitalization. In this article, we will take a closer look at what the Sensex is, how it is calculated, and its history and significance in the Indian stock market.

What is the Sensex and how is it calculated?

The Sensex is an index of the top 30 companies listed on the BSE. It is calculated based on the market capitalization of these companies. Market capitalization is the total value of a company’s outstanding shares of stock. The higher the market capitalization of a company, the more weight it has in the Sensex.

The calculation of the Sensex is based on the free-float market capitalization methodology. This means that only the shares that are available for trading in the market are considered in the calculation. Shares held by promoters, governments, or other entities that are not available for trading are excluded.

The Sensex is calculated using the market capitalization-weighted method. This means that the companies with the highest market capitalization have the most weight in the index. The weight of each company is determined by its free-float market capitalization as a percentage of the total market capitalization of all 30 companies in the index.

History and significance of the Sensex in the Indian stock market:

The Sensex was first introduced in 1986 with a base value of 100. Since then, it has become the benchmark index of the Indian stock market. It is widely followed by investors, traders, and analysts as a barometer of the Indian economy and stock market.

The Sensex has seen many ups and downs in its history. It has gone through several bull and bear phases, with some of the most significant movements being seen during times of economic and political instability in India. Despite these fluctuations, the Sensex has grown significantly over the years. In January 2022, the Sensex crossed the 60,000 mark for the first time in its history.

II.Components of the Sensex Index

The Sensex index is composed of 30 of the largest and most actively traded companies listed on the Bombay Stock Exchange (BSE), which is one of the major stock exchanges in India. These companies are selected based on several factors, including their market capitalization, trading volume, and overall contribution to the Indian economy.

The components of the Sensex index span across various sectors, including finance, information technology, energy, consumer goods, and healthcare. The companies included in the Sensex index are representative of the Indian economy as a whole, and their performance can serve as an indicator of the overall health of the Indian stock market.

30 companies in the Sensex, grouped by sector:

SectorCompanies
AutomobileMaruti Suzuki India, Mahindra & Mahindra
BankingHDFC Bank, ICICI Bank, Kotak Mahindra Bank, State Bank of India
CementUltraTech Cement, Shree Cement
Consumer GoodsHindustan Unilever, Nestle India
EnergyReliance Industries, Oil and Natural Gas Corporation
Financial ServicesBajaj Finserv, Bajaj Finance, Housing Development Finance Corporation, SBI Life Insurance Company, HDFC Life Insurance Company, ICICI Prudential Life Insurance Company
FMCGITC
HealthcareDr. Reddy’s Laboratories, Sun Pharmaceutical Industries
Information TechnologyInfosys, Tata Consultancy Services, HCL Technologies, Tech Mahindra, Wipro
MetalTata Steel, Hindalco Industries, JSW Steel
TelecomBharti Airtel
UtilitiesNTPC Limited

Each company in the Sensex index is assigned a weight based on its market capitalization, which is the total value of all of its outstanding shares. The larger the market capitalization of a company, the higher its weighting in the index. This means that companies with larger market capitalizations have a greater impact on the overall performance of the index.

It’s important to note that the components of the Sensex index are periodically reviewed and updated to ensure that the index remains representative of the Indian stock market. Companies that no longer meet the criteria for inclusion may be removed from the index, while new companies may be added if they meet the selection criteria.

III. Criteria for company selection

The criteria for selecting companies to be included in the Sensex Index are as follows:

  1. Market capitalization: The market capitalization of a company should be among the top 100 in the Indian stock market.
  2. Trading frequency: The company’s shares should have been traded at an average frequency of at least 10% in the last six months.
  3. Listing history: The company’s shares should have been listed on the Bombay Stock Exchange (BSE) for at least six months.
  4. Sector representation: The selected companies should represent various sectors of the Indian economy.
  5. Track record: The selected companies should have a good track record of compliance with the securities laws and regulations.
  6. Liquidity: The companies should have sufficient liquidity in the stock market to enable easy trading of their shares.
  7. Corporate governance: The selected companies should have a good track record of corporate governance and ethical business practices.

IV. Performance of the Sensex Index

The historical performance of the Sensex has been impressive, making it one of the most closely watched stock market indices in the world. The index was first introduced in 1986 with a base value of 100, and since then it has grown exponentially. As of 2021, the Sensex has crossed the 50,000 mark, representing a more than 500-fold increase from its base value.

Over the years, the Sensex has witnessed several market cycles, including bull runs and bear markets, with the most notable being the Harshad Mehta scam in the early 1990s and the global financial crisis of 2008. However, despite these challenges, the Sensex has managed to bounce back and reach new heights.

Performance of Sensex since inception- 

Year RangeStarting ValueEnding ValueChange in PriceChange in %
1986-19911001,452.631,352.631,352.63%
1991-19961,452.633,535.772,083.14143.29%
1996-20013,535.773,262.32-273.45-7.73%
2001-20063,262.3210,930.367,668.04235.30%
2006-201110,930.3619,410.848,480.4877.52%
2011-201619,410.8425,838.716,427.8733.10%
2016-202125,838.7148,732.5522,893.8488.58%

When compared to other major indices in India, such as the Nifty 50, the Sensex has generally outperformed. However, both indices tend to move in tandem, as they are composed of many of the same companies.

Globally, the Sensex is often compared to other emerging market indices, such as the MSCI Emerging Markets Index and the FTSE Emerging Markets Index. While the Sensex has shown strong performance over the years, it has faced competition from other emerging markets, such as China, which have grown at a faster rate.

It is important to note that the performance of the Sensex is not indicative of the overall health of the Indian economy. Rather, it represents the performance of a select group of companies in the Indian stock market. Nonetheless, the Sensex remains a valuable tool for investors and traders in India and around the world, as it provides a snapshot of the performance of some of India’s largest and most influential companies.

V. Investing in the Sensex Index

Investing in the Sensex Index provides investors with a way to gain exposure to a broad range of companies in various sectors within the Indian stock market. Here are some ways to invest in the Sensex Index:

  1. Exchange-traded funds (ETFs): Investors can buy ETFs that track the performance of the Sensex. These funds offer diversification across the entire index and can be bought and sold like stocks on a stock exchange.
  2. Index futures: Investors can also trade index futures contracts based on the Sensex. These futures contracts are agreements to buy or sell the Sensex at a predetermined price on a future date.
  3. Mutual funds: Investors can choose from a variety of mutual funds that invest in the Sensex or a selection of its components. These funds offer diversification and are professionally managed.
Benefits of investing in the Sensex Index:
  1. Diversification: The Sensex Index is composed of 30 companies across various sectors, which reduces the risk of investing in a single company or sector.
  2. Long-term growth potential: The Indian economy has been growing steadily over the past few decades, and the Sensex Index has historically outperformed other asset classes over the long term.
  3. Easy access: Investors can easily invest in the Sensex Index through ETFs, index futures, or mutual funds.
Risks of investing in the Sensex Index:
  1. Market volatility: Like any stock market investment, the Sensex Index is subject to market fluctuations and can be volatile over the short term.
  2. Concentration risk: Although the Sensex Index is diversified across sectors, it is still heavily weighted towards a few large companies. If these companies experience significant declines, the entire index can be impacted.
  3. Currency risk: For investors based outside of India, investing in the Sensex Index involves currency risk, as fluctuations in the exchange rate can impact returns.

Investors should carefully consider their investment objectives, risk tolerance, and time horizon before investing in the Sensex Index.

VI. Future of Sensex Index

The future of the Sensex Index looks promising as the Indian economy continues to grow and develop. However, like any index, there are potential challenges and opportunities to consider.

Potential changes or updates to the Sensex methodology could include adjustments to the selection criteria or weighting methodology. Additionally, as the Indian economy evolves, new sectors or industries may emerge that could be included in the index.

In terms of growth prospects, the Sensex has historically performed well and has the potential to continue to do so as the Indian economy grows. However, there are also potential challenges to consider, such as geopolitical risks, regulatory changes, and fluctuations in global markets.

VII. Conclusion

In conclusion, the Sensex is a critical benchmark for the Indian stock market and is used as a barometer for the country’s economic growth. The index includes 30 of the largest and most prominent companies across various sectors. The methodology used to select and weigh the companies in the index ensures that it is representative of the overall market.

Investing in the Sensex can be done through various financial instruments such as ETFs and futures contracts, offering investors exposure to the Indian stock market. While investing in the Sensex offers the potential for high returns, it also carries risks that should be considered.

The future of the Sensex looks promising, with expectations of continued growth in the Indian economy and the stock market. However, challenges such as political and economic instability, inflation, and changes in government policies could impact the performance of the index.

Overall, the Sensex is a vital indicator of the Indian stock market and its economy. Investors and traders must keep track of the index’s performance to make informed decisions when investing in the Indian stock market.