Sensex

 

What is Sensex?

     It is a portmanteau of two terms- Sensitive and Index and was coined by Deepak Mohoni, a stock market expert. Sensex was meant to denote the most popular market index of 30 companies listed under Bombay Stock Exchange. The component companies listed in this index today are some of the biggest companies in this country with the most actively traded stocks.

Companies included under it are selected by S&P and BSE commitee based on following criteria:

1.Companies have to be listed under Bombay Stock Exchange in India.

2.It must consist of large or mega-cap stocks.

3.It has to be relatively liquid.

4.It must generate earnings from core activities.

5.Companies must contribute to keep the sector balanced with the country’s equity market.

Ever since opening up in the 1990s, it has witnessed rapid growth, especially post 2000. For instance, in 2002, information technology companies helped the index cross 6000 marks for the first time. From then onwards, Sensex grew by leaps and bounds and closed at 39,056.65 on 2nd April 2019, crossing 39,000 points for the first time.

This growth curve can be owed to a rapid increase in India’s Gross Domestic Product (GDP), since the turn of this century.

Companies under this Index

Some of the companies under this index include Axis Bank, Asian Paints, Bajaj Finance, Bharti Airtel, Coal India, HCL Technologies, Hindustan Unilever, ICICI Bank, IndusInd Bank, Tata Consultancy Services, Larsen &Toubro, etc.

Understanding the Sensex:

The Sensex was launched on Jan. 1, 1986. It is both a bellwether and an investable index used to track the performance of India's 30 largest and most financially sound companies. These companies are listed on the BSE (previously known as the Bombay Stock Exchange) and represent some of the biggest and most important sectors of the Indian economy. As such, it is India's most-tracked index.

The Sensex is calculated in Indian rupees (INR) and U.S. dollars. As of Aug. 31, 2021, the mean total market cap of the index was 3.71 trillion rupees. The top five constituents listed on the index were:

History of the Sensex

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 index experienced enormous growth since India opened up its economy in 1991. The biggest gains 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 consumer 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.

How Does the Sensex Work?

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 public companies. The companies that make up the Sensex are drawn from the Bombay Stock Exchange, which is the largest 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.

Major Plunges in Sensex stocks:

The world economy faced a major crisis between 2008 and 2009 with a fall in the Dow Jones industrial average in its intraday trading, leading to a stock market crash. This crash also affected India’s stock market adversely and led to a loss of 1408 points on 21st January 2008, which was its highest since its inception. The next day the index went into a downward spiral with trading suspended for an hour.

From January to November 2008, the index continued to drop consistently, throwing the entire market into uncertainty. In October 2008, the market closed at 8509.56 points; it’s lowest in the last 10 years.

How the Sensex is 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. But 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.

Etymology:

The term Sensex was coined by Deepak Mohoni, a stock market analyst in 1989.[1][2] BSE Sensitive Index then was at about 750 points. it is a portmanteau of the words Sensitive and Index.

Can we buy Sensex?

You can start investing directly in the constituents of the SENSEX and the weightage they have in that particular index. This means that you can directly buy the stocks in the quantity which is equivalent to the stock's weightage. The better option to invest in SENSEX would be to invest in index mutual funds.

How do SENSEX constituents get decided?

Every stock is included in the SENSEX only after proper due diligence and this ensures only quality stocks are part of this index. As a matter of fact, companies need to fulfill the following 5 criteria to be considered for addition to SENSEX.

• Must be listed on Bombay Stock Exchange (BSE) – The company has to be listed on the Bombay Stock Exchange; if the company is not listed on BSE, then it cannot be a part of SENSEX
• Should be a large or mid-sized Company – The company must have a large-to-mid size market capitalization to be eligible for addition to SENSEX. Due to these criteria, only the best and biggest companies are part of this index
• Shares should have high liquidity – For a stock to be considered for addition to SENSEX, it needs to be liquid. What it means is that it should be easy to buy and sell that particular stock. Since this liquidity is a part function of the quality of the underlying business, this also acts as a filtering criteria
• Substantial Revenue should be from core activities – The company should generate substantial revenue from its core business activities. There are a lot of companies that have been classified in different sectors according to their core activities, depending on what kind of business the company is into. For example, Bharti Airtel is a telecom company, Sun Pharma is a pharmaceutical company
• Sector Weight of the company– Sector balancing is another very important criteria. For any particular index, every sector has a weight attached to it, which represents the economy. For example, financial services have the maximum weightage, be it in NIFTY or any other index. So, any company, whether it is already a part of the SENSEX or has been included in the list, it is necessary to maintain the balance of the sector to which it belongs.