What is the Sensex: A Brief Guide to Invest in Share in 2022

The Sensitive Index or Sensex, otherwise known as the S&P BSE Sensex index, is the Bombay Stock Exchange (BSE)’s benchmark index. The Sensex is made up of 30 of the largest and most actively-traded stocks on the BSE. The Sensex does a great job of providing an insight into the state of India’s economy. The composition of the Sensex undergoes bi-annual reviews in June and December. The Sensex was created in 1986, making it the oldest stock index in the country. It has been consistently used by analysts and investors to observe the different cycles of India’s economy, along with the growth and decline of certain industrial sectors.

Sensex 101

What constitutes the Sensex?

Sensex is a portmanteau of the term Sensitive and Index. It was coined by famous stock market analyst Deepak Mohoni. For a stock to be a part of the Sensex, it should fulfill the following 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
  • it should keep the sector balanced broadly in line with the Indian equity market.

The BSE Sensex suffered its worst ever fall of 12.7% on April 18th, 1992. This shocking plunge was a result of the shocking revelations of a scam through which money was siphoned from the public banking sector to pump into stock by a prominent broker.

How has the Sensex grown over time?

Ever since India opened up its economy in 1991, the BSE Sensex has witnessed enormous growth. While the gains were a little slow initially, they really picked up speed in the 21st century. The Sensex used to hover around the 5,000 mark in the early 2000s. In January 2020, it was more than 42,000. This incredible gain has been buoyed by the rapid growth in India’s economy, one of the fastest rates in the world. One of the biggest reasons behind the growth of the Indian economy has been the rise of the country’s middle class, and vice versa. As per a recent study, over 80% of the country’s households are expected to become middle income households by 2030. This is a massive increase from the 50% rate of 2019. A nation’s middle class plays a major role in driving consumer demand. However, all of the positive outlook has been extremely downsized as a result of the Covid-19 pandemic and the Indian economy has regressed by over 23% because of it. However, it is expected to bounce back strong once the crisis is over.

What is the Free-Float Capitalization method?

At the time of its inception in 1986, the BSE Sensex was calculated with the help of the market-capitalization weighted methodology. However, that changed from September 2003 and the BSE Sensex has been calculated using the free-float capitalization method since then. This method provides a weighting for the effect of a company on the index. The free-float capitalization method is a variant of the market cap method. However, instead of using a company’s outstanding shares, it uses its float, which is the number of shares that are readily available for trading. As a result of that, the free-float method does not include restricted stocks, such as those held by company insiders, which can’t be readily sold.

In order to calculate the free-float capitalization of a company, you first need to find its market cap. The market cap of a firm is the number of outstanding shares multiplied by the share price. After that, you need to multiply that with its free-float factor. The free-float factor represents the percentage of floated shares to outstanding. Let’s use this example for clarity, 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% free float falls in the 80 to 85 percent free-float factor, or 0.85. This free float factor needs to be multiplied to its market cap. Hence we take 12 million shares and multiply it by the rate of $10 per share. To calculate the free float capitalization of the firm, we need to multiply that with the free float factor (0.85). That equals to $102 million in free-float capitalization.

So that was a brief guide to the BSE Sensex. Hopefully, you will have a better idea of it after reading this post and you can use this knowledge to make wise investment decisions in the BSE.

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