If you have ever heard about stock market trading you must have come across the term Sensex index. While the term is commonly used, many don’t really understand the meaning of it. To begin with, the Sensex index represents 30 top forms in the country.
But is it enough to know a simple definition of Sensex? No. To understand trading and investments better you first need to get hold of the fundamentals of the Sensex index so let’s delve into its details.
What is the Sensex Index?
Sensex Index also known as BSE 30 is an index representing the top 30 financially performing companies listed on the Bombay Stock Exchange. Know that the Sensex is reviewed twice each year in June and October to ensure that the index is float-adjusted and market capitalisation-weighted.
Sensex is India’s oldest stock index and it was launched on 1st January 1986. Since it represents the top 30 firms listed on the Bombay Stock Exchange, Sensex is India’s top-tracked index. Sensex plays an important role for investors and traders as it represents promising investment opportunities.
Another way to estimate the market’s expectation of volatility is the Nifty VIX. India Volatility Index or the Nifty VIX measures how much the Nifty 50 index is expected to fluctuate in the next 30 days. It’s based on Nifty 50 options data and is currently at 15.60.
Sensex Index: How is it Decided?
Understanding key elements of the Sensex index helps in tracking the index better and evaluating what parameters you can base your investment decision on. Here are five criteria that organisations need to fulfil to be considered for the Sensex index:
1. Listed on the Bombay Stock Exchange
A company must be listed on the Bombay Stock Exchange to be considered for evaluation under the Sensex index.
2. Huge or Medium-Sized Firm
Remember that small enterprises with limited capitalisation can not come under the Sensex index. The company must possess large to medium-sized capitalisation.
3. Company’s Finances
It is mandatory that the company’s substantial money comes from its primary business operation. A company can operate in various areas but every company is listed under a sector that is their primary field of operation and to be considered for the Sensex index, a major part of the money should come from it.
4. Liquidity in Stocks
Another criterion that companies are evaluated on is the liquidity of their stocks. Stock liquidity simply reflects that buying and selling them is simple. For the Sensex index, companies must have liquid stocks.
5. Company’s Sector Weight
The company’s sector weight or sector balancing is an important criteria to be listed on the sensex. Know that every company is assigned a certain weight for an index that represents the stability in the given sector.
For instance: Finance companies are weighed highly in NIFTY. Therefore, companies need to ensure that the stability in their sector of operation is preserved and valued highly.
The Working and Calculation of the Sensex Index
Now that you have an understanding of the evaluation process for companies to be listed under the Sensex index, let’s take a look at the key elements you should know about its working and calculation:
- The Sensex Index is calculated based on a free-floating capitalisation method. This simply means that companies with larger capitalisation are given more weight.
- Remember that under the free-float capitalisation method, only the freedom of trading the company’s shares is taken into consideration, unlike market capitalisation which takes a broader view.
- Interestingly, when the Sensex index was first launched, it was calculated as per market capitalisation but gradually shifted to free-floating capitalisation.
- The Sensex index is calculated in Indian rupee and US dollar.
- The ten-year annualised Sensex return was marked at 14.52% and for five years it was marked at 16.28% as of 29th December, 2023.
The Bottom Line
Sensex index is considered one of the most reliable sources to make an investment decision since it is calculated and evaluated based on several key factors that a company must fulfil.
One of the finest investors of all time Mr Warren Buffet also placed reliance on the Sensex index to evaluate the market condition and make better investment decisions. Even for beginners, the index is a smart and easy option to embark on the journey as an investor.
