Why is the calculation of the Sensex essential?
Whether or not individuals are directly or indirectly connected with it, the entire country is obsessed with the increase and fall of the Sensex. With the nation’s increased financial activity, the Sensex has become a family word that is closely followed every day by millions. But very few individuals are aware of the methodology used to calculate the Sensex.
What is Sensex?
Sensex is a short form of the Sensitive Bombay Exchange Index (Sensex) – the Bombay Stock Exchange (BSE) benchmark index if we say “Sensex,” that indicates collecting the BSE’s 30 biggest and most actively traded stocks.
The Sensex is mainly a Bombay Stock Exchange (BSE) reflective index. Founded in 1875, the stock exchange had no official index until January 1, 1986, when the Sensex was introduced to measure Indian markets ‘ efficiency. India’s other primary index is the barometer of the National Stock Exchange (NSE), the Nifty. The Sensex includes 30 prominent stocks from all primary industries that are actively traded in the exchange. The Sensex thus truly represents the Indian stock market motion.
Why is it essential for Sensex?
The SENSEX is an indicator of BSE stocks showing whether stocks are rising or falling.
The SENSEX is nothing but the abbreviated form of the BSE-Sensitive Index, which is an index of 30 stocks “Market Capitalization-Weighted” representing a sample of big, well-established and financially sound businesses.
This index is commonly used to evaluate Indian stock market performance, which is regarded to be the pulse of Indian stock markets as it reflects The Mumbai Stock Exchange’s fundamental universe of listed stocks.
SENSEX’s primary goal is to act as the Indian Capital Markets benchmark index. Individual investors widely accept it, institutional investors, foreign investors and managers of funds.
The index’s goals are:
- To evaluate market movements.
- Work as a performance benchmark for funds etc.
SENSEX’s value is calculated, taking into account the inventory prices of 30 different companies listed as BSE. The technique used is referred to as the “free-float market capitalization” approach. A company’s market capitalization is chosen by multiplying its stock price by the number of the company’s issued shares. To conclude the free-float market capitalization, this market capitalization is further multiplied by the free-float factor.
The following steps are used to calculate Sensex:
- The market capitalization of each of the 30 companies that comprise the index is first defined by multiplying their stock prices by the number of shares issued by that company.
- To obtain free-float market capitalization, market capitalization is then multiplied to the free-float factor. (The company’s free-float factor is multiple with which the company’s total market capitalization is adjusted to reach its free-float market capitalization. BSE is determined based on the data presented by the companies. The price of the free-float factor is between 0.05 and 1.00. A free-float factor of 0.55 indicates that the company determines only 55 pct of the market capitalization factor.
- The Index constituents ‘ free-float market capitalization is then divided by a number called the Index Divisor. This divider index is the only connection to the index’s initial base period value. (For Sensex, the duration of the base value is 1978-79) This value gives for the index to be compared over time.