What Is the Sensex?
Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of India's BSE, formerly known as the Bombay Stock Exchange.) The Sensex is comprised of 30 of the largest and most actively-traded stocks on the BSE, providing a gauge of India's economy. The index's composition is reviewed in June and December each year. Created in 1986, the Sensex is the oldest stock index in India. Analysts and investors use it to observe the cycles of India's economy and the development and decline of particular industries.
Understanding the Sensex
The term Sensex was coined by stock market analyst Deepak Mohoni and is a portmanteau of the words Sensitive and Index. The constituents of the index are selected by the S&P BSE index Committee based on five criteria: it should be listed in India on BSE, it should be a large-to mega-cap company, the stock should be relatively liquid, the company should generate revenue from core activities, and it should keep the sector balanced broadly in line with the Indian equity market. The BSE Sensex's plunged 12.7%—its worst-ever fall—on April 18,1992 after revelations of a scam in which a prominent broker siphoned money from the public banking sector to pump money into stock.
- The Sensex refers to India's benchmark stock index, which was created in 1986 and represents 30 of the largest and most well-capitalized stocks on the BSE.
- The Sensex has been on a growth curve since India opened up its economy in 1991. Most of its growth has occurred in the 21st century.
The Rise of the Sensex
The BSE Sensex has experienced enormous growth since India opened up its economy in 1991. The biggest gains have occurred in the 21st century, when it rose from around 5,000 in early 2000 to more than 42,000 in January 2020. This has mainly been the result of India's surging economy, which for years has grown at one of the fastest paces in the world.
India’s expanding economy owes much to the rise of the nation's middle class, and vice versa. According to one study, nearly 80% of the nation's households will be middle-income by 2030, up from about 50% in 2019. The middle class is an important driver of consumption demand.
However, India's economic growth has slowed in recent years, reaching the lowest level in a decade in 2019. The outbreak of the global coronavirus pandemic in early 2020 has slowed the economy further, casting a shadow over future gains.
Free-Float Capitalization Method
When it was launched in 1986, the Sensex was calculated based on a market-capitalization weighted methodology. Since September 2003, the Sensex has been calculated based on a free-float capitalization method, which provides a weighting for the effect of a company on the index. This is a variation of the market cap method, but instead of using a company's outstanding shares, it uses its float, which is the number of shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by company insiders, which can't be readily sold.
To find the free-float capitalization of a company, first find its market cap, which is the number of outstanding shares multiplied by share price, then multiply its free-float factor. The free-float factor is determined by the percentage of floated shares to outstanding. For example, if a company has a float of 10 million shares and outstanding shares of 12 million, the percent of float to outstanding is 83 percent. A company with an 83-percent free float falls in the 80 to 85 percent free-float factor, or 0.85, which is then multiplied by its market cap. Twelve million shares multiplied by $10 a share, then multiplied by 0.85 equals $102 million in free-float capitalization.
Frequently Asked Questions
What is the Sensex?
The S&P BSE Sensex index, colloquially known as the “Sensex” or “Sensex Index”, is a benchmark index of 30 of India’s largest and most liquid publicly traded companies. The companies that make up the Sensex are drawn from the Bombay Stock Exchange, which is the largest stock exchange in India and one of the largest stock exchanges in the world. Many investors throughout the world use the Sensex as a barometer of the overall state of the Indian economy, which has grown substantially in recent decades.
How is the Sensex calculated?
The Sensex is calculated using a free-float capitalization method. This method is similar to the market-capitalization weighting method, in which companies are weighted according to their share of the total market capitalization of the index. As such, the Sensex gives more weight to the largest companies within its index. However, unlike the market-capitalization method, the free-float capitalization method only takes into account shares that are freely available to be traded, as opposed to restricted shares or those held by companies insiders.
How has the Sensex performed in recent decades?
Between 1986 and 2021, the Sensex has grown at a compounded rate of roughly 14% per year. This growth reflects the substantial growth of the Indian economy during that time-frame, and in particular the expansion of that nation’s middle class. More recently, the Sensex declined by nearly 40% in March 2020 in the midst of the coronavirus health crisis, but recovered strongly over the remainder of the year. The Sensex went on to set a new all-time high as of February 2021.