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What is 'Sensex'

Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively-traded stocks on the BSE, providing an accurate gauge of India's economy. Initially compiled in 1986, the Sensex is the oldest stock index in India.

BREAKING DOWN 'Sensex'

Analysts and investors use the Sensex to observe the overall growth, development of particular industries, and booms and busts of the Indian economy. Some of the highest priced shares listed on the Sensex, as of July 2016, include those of ACC (cement and cement products), HDFC Bank (banking), Housing Development Finance Corporation (finance and housing), Infosys Technologies (computer software), Larsen & Toubro (engineering), Mahindra & Mahindra (automobiles), Maruti Suzuki India (automobiles) and Tata Consultancy Services (computer software).

The Sensex experienced enormous growth in the first decade of the 21st century, rising from a close of 3,377.28 in 2002 to one of 20,286.99 in 2007. This is reflective of India's GDP growth since the turn of the century, one that ranks as one of the fastest in the world. According to IMF estimates, India's GDP grew at an average annual rate of 8.01% between 2002 and 2007. Its GDP faltered to a growth rate of 3.89% in 2008, in stride with the global financial meltdown of that year, but was back on a strong track with a growth rate of 10.26% in 2010. GDP growth in 2016 is expected to be over 7%, significantly higher than the projected growth rates of 2-2.5% in the U.S. and 1-2% in Japan and Europe. This economic miracle owes much thanks to the rise of the Indian middle class, which stood at less than 1% of the global middle class in 2000 but is expected to account for 10% by 2020. The middle class is an important driver of consumption demand.

Free-Float Capitalization Method

The index is calculated based on a free-float capitalization method when weighting 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, 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 (number of outstanding shares x 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%. A company with an 83% free float falls in the 80-85% free-float factor, or 0.85, which is then multiplied by its market cap (e.g., $120 million (12 million shares x $10/share) x 0.85 = $102 million free-float capitalization).

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