Sensex – Meaning
Before comprehending the topic Sensex-Meaning, let us discuss GDP.
You may have frequently read about Gross Domestic Product (GDP) which is considered to be the barometer of an economy. And you know that GDP growth rate is widely used across the world to see how an economy is performing. Often, the value of the GDP is considered to be an indicator of the size of an economy. For e.g. United States is the biggest economy in the world followed by China & India based on GDP figures.
Similar to GDP, you may consider Sensex as an index which indicates how the business in a country is performing. This index is maintained by Bombay Stock Exchange in India and is called the Sensitive Index. At times, it is also referred to as BSE Sensex in common parlance. Apart from Sensex, there are other index which represent the same performance benchmark for example NIFTY.
To fully appreciate the concept of Sensex, you need to understand about the existence & importance of an Stock Exchange.
When you start a business, you can raise funds either as loan/debt or by selling equity stake/shares. Stock exchanges facilitate the equity transaction between people looking to raise money for their business and investors looking forward to claim ownership by investing their money.
To raise equity capital for your business, you need to list your company on the stock exchange which is referred to as going public or floating your IPO (initial public offer). Of course, there are other criteria’s set by the stock exchange which need to be met for a company to get listed.
Facts about BSE (Bombay Stock Exchange)
Bombay Stock Exchange exists in India since 1875 and is considered to be Asia’s first stock exchange. It is the 10th largest stock exchange in the world with more than 5000 companies listed having a total market capitalization of over $2.2 bn as on April 2018.
BSE was founded by Mr. Premchand Roychand an influential businessman who made a fortune in the stock-broking business and is referred to as the Big Bull of India.
Also, BSE became the first listed stock exchange in India since 2017.
Mr. Sethurathnam Ravi is the current Chairman of Bombay Stock Exchange. He replaced Mr. Dhirendra Swarup in 2017.
Sensex is a statistical aggregate of market capitalization of 30 selected companies on the BSE with particular weights assigned to each company.
Now this might sound complicated, so let us break it into different components.
There are multiple claims to ownership of a company. Some shares may be held by the promoters, government & related entities, some shares may be pledged while remaining will be available for trading. The shares which are available for trading in the stock exchange are referred to as the free float. If you multiply the number of such shares by the share price, you get the free float market capitalization.
On the other hand, if you multiply share price with the total number of shares, you get the valuation of the company.
If you remember about statistics problems from school time, you would recollect terms like average or mean, weighted average, mode, median etc.
Sensex is nothing but the weighted average of free float market capitalization of 30 selected companies. And these weights are defined by the Bombay Stock Exchange.
The 30 selected companies are adjudged on the basis of their financial soundness, trading activity & performance. These companies have been selected in a way to represent various industrial sectors of the economy while picking the large & well established firms within those sectors.
Here is a list of all the 30 companies which are a part of Sensex –
|Adani Ports||Asian Paints||Axis Bank||Bajaj Auto||Bharti Airtel|
|Cipla||Coal India||Dr Reddys Labs||GAIL||HDFC|
|HDFC Bank||Hero Motocorp||HUL||ICICI Bank||Infosys|
|Sun Pharma||Tata Steel||TCS||Wipro||Bajaj Auto|
There might be few changes in the composition of Sensex declared by BSE from time to time.
You may track the sensex composition on BSE India website here . BSE Sensex is one of the most widely tracked stock market benchmark index in India.
As on 17th Dec 2019, the current composition is as follows –
How SENSEX is calculated?
Here is a simple example so that you can understand the basics for calculating SENSEX and other index like NIFTY, NIFTY BANK etc.
Suppose there are 2 companies on a Index –
Company 1 has – Total shares 1000 , Free Floating Shares = 500
Suppose the Share Price for Company 1 is Rs 10.
Market Capitalization of Company 1 = 1000*10 = 10000
Free Float Market Cap = 10000*500/1000 = 5000
Company 2 has – Total shares 2000 , Free Floating Shares = 200
Suppose the Share Price for Company 1 is Rs 20.
Market Capitalization of Company 1 = 2000*20 = 40000
Free Float Market Cap = 10000*200/2000 = 1000
Total Free Float Market Cap = 5000 + 1000 = 6000.
Suppose the base year index was 100.
So current valuation of the index = 6000*100/100 = 6000
How can you use Sensex for your investments?
To appreciate the importance of Sensex, check this historical chart –
BSE sensex index is getting published since 1986 with its base value 100 and base year 1978-1979. Now from the chart about you can see that in 2009 sensex was around 10000 with current value hovering around 40000.
Key Conclusions about Sensex
You can conclude the following key points which elaborates further on Sensex-meaning and its importance –
- Firstly, Sensex has grown 4x in 10 years. This translates to doubling in 5 years and a CAGR of around 14%. If you invested 10 Lacs in BSE Sensex in the year 2009, your investment value would have have grown to minimum Rs 40 lacs.
- Secondly, Sensex made its low around 2008 which was the year of US/Global recession. So investing your money just after recession with an expectation of the world existing after recession is a wise decision for wealth generation.
- Thirdly, the companies included in the Sensex as a group have grown 4x over the period of last 10 years. So if you think these companies are going to continue this trend, you may stay invested in the index.
- Fourthly, buying an index fund does not mean who have invested in all the 5000 companies listed on the BSE rather a selected 30 representing Sensex.
- Fifthly, Sensex serves as a proxy indicator of how the economy is doing.
- Sixthly, you can invest index funds or mutual funds investing in blue chip companies present in the index.
- Seventhly, to average out the effect of volatility, you may choose SIP method of investing.
- Eightly, Sensex made its recent lows around 2015, so if you invested at that time probably you made a good decision.
- Lastly, Price equity ratio of Sensex can be checked here. If PE is close to 15, you are close to ideal time for investment. If PE ratio is on the higher side then market is overheated and might be headed for correction. As on December 2019, SENSEX PE is 28.91.
You may check more facts about Sensex here.
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