What is Sensex? How do work sensex in share market?

What is Sensex?

The S&P BSE Sensex, is the benchmark stock market index of the Bombay Stock Exchange (BSE) in India. It represents the performance of the top 30 well-established and financially sound companies listed on the BSE across various sectors.

The index is calculated using the free-float market capitalization method, which means it takes into account only the shares available for public trading rather than considering the entire market capitalization of the companies. The index is value-weighted, with companies having higher market capitalization having a greater impact on the index's movements.

The base year for calculating the Sensex is 1978-79, and the base value is set to 100. As the stock prices of the constituent companies change, the index value fluctuates, reflecting the overall movement of the Indian stock market.

The Sensex is an essential indicator for investors, analysts, and policymakers to assess the performance and sentiment of the Indian stock market. It provides valuable insights into the overall health and direction of the country's economy and financial markets.

How do work sensex in share market?

The Sensex works as a key indicator of the overall performance of the Indian stock market. It reflects the collective movement of the top 30 companies listed on the Bombay Stock Exchange (BSE) based on their market capitalization and liquidity. Here's how the Sensex works in the share market:

Selection of Constituent Companies: The BSE selects the top 30 companies to be part of the Sensex based on certain criteria like market capitalization, trading volume, and other financial factors. These companies are usually leaders in their respective industries and represent a significant portion of the total market capitalization on the exchange.

Calculation Methodology: The Sensex is calculated using the free-float market capitalization method. This means that it considers only the shares available for public trading and not the total number of shares issued by the company. It gives more weightage to the shares that are available for trading in the market.

Value-Weighted Index: The index is value-weighted, which means that companies with higher market capitalization have a greater impact on the index's movements. A company with a larger market capitalization will influence the Sensex more than a smaller company.

Base Year and Base Value: The base year for calculating the Sensex is 1978-79, and the base value is set to 100. The index value is derived by comparing the current market capitalization of the constituent companies to their market capitalization in the base year.

Index Rebalancing: The composition of the Sensex is periodically reviewed, typically every quarter, to ensure that it reflects the changing market conditions and company performances. If a constituent company no longer meets the selection criteria or if a more suitable company emerges, changes are made to the index constituents.

Impact on the Share Market: The Sensex's movement has a significant impact on investor sentiment and the broader share market. A rising Sensex is generally considered a positive sign, indicating bullish market sentiments, while a falling Sensex can signify bearish market sentiments. Investors often use the Sensex as a benchmark to assess the performance of their investments and to make informed decisions.

It's important to note that the Sensex is just one of the many stock market indices in India, and there are several other indices like Nifty 50, Nifty Bank, etc., that represent different segments of the market and provide additional insights to investors and analysts.

What is Sensex and How It is Calculated?

The calculation of the Sensex involves several steps and factors, primarily focusing on the market capitalization of the constituent companies. Here's a step-by-step explanation of how the Sensex is calculated:

Calculation of Sensex:

Selection of Constituent Companies: The first step is to select the companies that will be part of the Sensex. The Bombay Stock Exchange (BSE) has a selection committee that chooses the top 30 companies based on certain criteria, including market capitalization, liquidity, and other financial factors. These companies are typically leaders in their respective industries and represent a significant portion of the total market capitalization on the exchange.

Market Capitalization: Once the constituent companies are selected, the next step is to calculate their market capitalization. Market capitalization is the total value of a company's outstanding shares in the stock market and is calculated by multiplying the current market price of a company's shares by its total number of outstanding shares.

Free-Float Market Capitalization: The Sensex uses the free-float market capitalization method. It considers only the shares that are available for public trading (free-float shares) and excludes shares held by promoters, governments, and other strategic investors. Free-float market capitalization is calculated by multiplying the number of free-float shares by the current market price.

Index Value Calculation: The index value is calculated by summing up the free-float market capitalization of all the 30 constituent companies. The sum is then divided by the "Index Divisor" to arrive at the index value.

Index Divisor: The Index Divisor is a constant number that is used to scale the index value to the base value. The base value of the Sensex is 100, and the base year is 1978-79. The Index Divisor is adjusted periodically to account for corporate actions, such as stock splits, mergers, and changes in the index constituents.

The formula to calculate the Sensex is as follows:

Sensex = (Sum of Free-Float Market Capitalization of Constituent Companies) / (Index Divisor)

Index Rebalancing: The composition of the Sensex is reviewed periodically, usually every quarter, to ensure that it reflects the current market scenario and includes the most relevant and significant companies. If a constituent company no longer meets the eligibility criteria or if a more suitable company emerges, changes are made to the index constituents.

Base Year and Base Value: As mentioned earlier, the base year for calculating the Sensex is 1978-79, and the base value is set to 100. The index value is relative to this base value, allowing comparisons of the current index value with the index value in the base year.
The Sensex is continuously updated throughout the trading day as the stock prices of the constituent companies change. It serves as a key indicator of the overall performance of the Indian stock market and is closely monitored by investors, analysts, and policymakers.