What is Sensex?

Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE) in India. Sensex comprises 30 of the largest and most actively-traded stocks on the BSE, providing an accurate gauge of India's economy. The index's composition is reviewed in June and December each year. Initially compiled in 1986, the Sensex is the oldest stock index in India. Analysts and investors use the Sensex to observe the overall growth, development of particular industries, and booms and busts of the Indian economy.



Understanding 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 stocks, it should be relatively liquid, it should generate revenue from core activities, it should keep the sector balanced broadly in line with the Indian equity market. The BSE Sensex's crashed by 12.7% - its worst 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 BSE Sensex experienced enormous growth since India opened up its economy in 1991. The growth has mainly occurred in the 21st century, rising from a close of 3,377.28 in 2002 to one of 20,286.99 in 2007 to a high of 38896.63 in August 2018. The growth has mainly occurred on the back of an increase in India's gross domestic product (GDP) growth since the turn of the century, which ranks as one of the fastest in the world.

According to International Monetary Fund (IMF) estimates, India's GDP grew rapidly between 2002 and 2007, and then stunted a bit in 2008, in stride with the global financial crisis of that year, but has been back on a strong growth rate since 2010. India’s growing GDP owes much credit to the rise of the Indian middle class, which stood at less than 1 percent of the global middle class in 2000 but is expected to account for 10 percent by 2020. The middle class is an important driver of consumption demand.

Key Takeaways

  • BSE Sensex refers to the Bombay Stock Exchange's index, which was created in 1986 and represents 30 of the largest and most well-capitalized stocks on the exchange.
  • The BSE 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.

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 is 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.