SENSEX

What Is The Bombay Stock Exchange (BSE)?

The Bombay Stock Exchange, also known as the BSE Limited, is a listed company that was established in 1875 by a cotton merchant, Premchand Roychand. It is also the oldest stock exchange in Asia and leads at the forefront of offering capital market services like IPO listing, trading of financial instruments and other investment and trading-related services. BSE is also known for the Sensex index, which is a real-time tracker of the Indian stock market, and investors use it globally to gauge the overall performance of Indian markets.

• The Bombay Stock Exchange Limited (BSE) was established in 1875. 
• It is the oldest stock exchange in Asia. 
• It offers services like IPO listing, trading of financial instruments and other financial services.

What Are Stock Market Indices?

Indices refer to a basket of stocks that are clubbed together by using a specific statistical method to derive an aggregate value that can represent the movement in a financial market as a whole. Nifty 50, Nifty Next 50, and Sensex are some of India's major stock indices that investors use to analyse market trends. These indices may differ in terms of their structure and formulation, but their objective remains the same: performing real-time tracking of the stock market and becoming a significant yardstick for measuring the performance of securities over a given time frame. 

Stock market indices are formed by different objectives and methods. They are also categorised on the basis of sectors, strategies or themes, such as the Nifty 50 and Sensex, which are the national indexes that fall under the category of broad-based indices, whereas the Nifty Auto and Nifty Bank are part of the sectoral index. 
 

• Indices are a group of stocks with an aggregate value that represents the general market sentiment. 
• These indices act as a yardstick for gauging the overall health of financial markets. 
• Nifty 50 and Sensex are India's national stock indices.
• Indices are categorised on the basis of sector, themes or strategies. 

What Is Sensex?

Sensex is the benchmark index of the Bombay Stock Exchange (BSE), which is the oldest stock exchange in India. BSE launched the Sensex on 1st January 1986 as a broad-based index that tracks the performance of the top 30 stocks that are listed on the Bombay Stock Exchange (BSE). It is operated by Standard and Poor’s (S&P), a leading creator of financial indices, and offers credit rating services for bonds and other companies. These 30 companies that are constituents of the Sensex index represent the most liquid and profitable BSE-listed companies. It works as a barometer for judging the overall market momentum and the sectoral performance of distinct sectors of the stock market. Further, the index has various variants that are categorised according to industries, themes, or strategies. 

• Sensex is a broad-based index launched by the Bombay Stock Exchange Limited. 
• It tracks the performance of the top 30 BSE-listed stocks. 
• Sensex is operated by Standard and Poor’s (S&P).
• Investors use Sensex to analyse the sentiment of the stock market as a whole. 
• The constituents of this index include companies falling under the large to mega-cap category. 

How Is Sensex Calculated?

Before 2003, the Sensex value was calculated based on the full market capitalisation method, but it was then changed, and the free float market capitalisation method was adopted. The new method included calculating the market cap and free float market capitalisation of all 30 companies and ranking them accordingly in the index. 

The free float market cap value includes the aggregate value of all the free float shares of a company, which means that it only considers those shares that are available for public trading and excludes restricted shares. Once the free float market capitalisation is calculated, the next step is to divide this market cap by the base market cap and multiply it by the base index value. The base market cap of Sensex is Rs. 2501.24 Cr., and the base index value is 100. 

The formula for calculating the value of Sensex is: 

Index value = Free float market capitalisation/(base market capitalisation * base index value)

The Sensex is reviewed every six months in a year, which means on a semiannual basis. The review takes place in June and December. However, not every review of the index needs to result in a change in the index's constituents; if the current companies of the index satisfy the eligibility criteria, then no restructuring takes place.
 

• The index value of Sensex is calculated through a free-float market capitalisation method. 
• Free-float refers to the shares available for public trading. 
• The base market capitalisation value and base index value of Sensex are Rs. 2501.24 Cr. and 100, respectively. 
• The Sensex is reviewed semi-annually in June and December.

Eligibility For Becoming A Constituent of The Sensex

The Bombay Stock Exchange (BSE) has clearly defined eligibility criteria for companies that they must fulfil if they wish to be included in the Sensex index. The eligibility criteria are as follows:

1. The stock must be listed on the Bombay Stock Exchange. 
2.  Stocks must have a listing history of at least six months on the Bombay Stock Exchange.
3. The stock must have been traded every day for the past six months. 
4. The stocks must be tradable through the Futures and Options contract. 
5. The stocks must fall in the large or mega-cap category. 

Key Takeaways

• BSE is the oldest stock exchange in Asia and was established in 1875. 
• Sensex is the benchmark index of the Bombay Stock Exchange (BSE). 
• It evaluates the performance of the top 30 stocks listed on BSE.
• It includes stocks of large and mega-cap companies.   
• Sensex was launched with a base value of 100 and a base market cap of Rs. 2501.24 Cr.
• Standard and Poor (S&P) operates the Sensex.
• It is calculated on the basis of the free-float market capitalisation method.
• The Sensex is reviewed and rebalanced, if required, semi-annually in June and December.