All About the Sensex: Meaning, History, Calculation and More

The Indian stock market is a vast marketplace with thousands of companies listed on the stock exchanges. It can be extremely challenging to gauge the market performance overall by accounting for the performance of each stock that is traded on the exchanges. However, with the help of broad market indices, it becomes easier to assess market performance. One such broad market index in India is the Sensex.  

What is Sensex: A closer look at the Sensex meaning and definition
The Sensex, also known as the BSE Sensex, is the benchmark index of the Bombay Stock Exchange (BSE). It is composed of the 30 largest and most financially sound companies trading on the BSE. These are also the 30 most actively traded stocks on the Bombay Stock Exchange. Monitoring this benchmark index can give you more clarity on the direction in which the broad market may be moving.

The history of the Sensex
Now that you know the meaning and definition of the Sensex, let’s take a closer look at the history of this benchmark index. The BSE Sensex was introduced on January 1, 1986. It initially comprised the top 100 companies trading on the BSE, but was later limited to include the top 30 companies alone. Today, the BSE Sensex is one of the most tracked benchmark indices in India. The term ‘Sensex’ is a combination of the words ‘Sensitive’ and ‘Index.; This term was coined by Deepak Mohoni, a stock market analyst.

How are the stocks in the Sensex selected?
The Bombay Stock Exchange has certain specific criteria to select the stocks that can be included in its benchmark index. Here is a preview of the primary aspects considered.

The company should have been listed in India on the BSE for at least one year.
The company’s stocks should have been traded on the exchange in each trading session over the past one year.
The company should be in the top 100 in terms of market capitalization.
The company should be in the top 150 in terms of an average number of trades per day and an average value of shares traded per day for the past one year.
The Index Committee should deem that the company has an acceptable track record.

How is the Sensex calculated? 
When it was first introduced, the BSE Sensex was calculated based on the market capitalization or full market cap method. However, in September 2003, the computation method for the Sensex was changed to the free-float capitalization method.

The free-float aspect represents that portion of a company’s total shares that are readily available to the public for trading. It does not include the restricted capital of a company, like the shares held by promoters, insiders, the government and other shares that are not traded publicly.

To understand how the Sensex is calculated, it is essential to first understand how the free-float market cap of a company is computed.

Calculating the free-float market capitalization of a company
In the free-float capitalization method, a float factor is assigned to each company based on the proportion of free-float available in that company. For example, let’s say that 10% of a company’s shares are closely held, while 90% are freely traded by the public. The free-float factor for this company will be 0.90.

This free-float factor is then multiplied by the company’s market capitalization to calculate the free-float market cap. Check out the formula below.

Calculating Sensex: A step-by-step guide
Now that you have understood how the free-float market cap is calculated, let’s take a closer look at how the Sensex value is computed.

Calculate the market capitalization of all the 30 companies in the benchmark index. 
Compute the free-float market capitalization of the 30 companies in the manner outlined above.
Add the free-float market capitalization of all 30 companies.
Use the following formula to calculate the value of the Sensex: 
Sensex = (Total free-float market capitalization ÷ Base market capitalization) x Base index value

The base year used to calculate Sensex is 1978-79 and the base value of the index is 100.

Sensex vs Nifty: A comparison
The Nifty 50 is another benchmark index like the Sensex. However, it is the benchmark index of the top 50 companies on the National Stock Exchange. Here is a preview of the key differences (and similarities) between the Sensex and the Nifty 50.

Conclusion 
Now that you know all about Sensex, you can track this benchmark index to get a better idea of the overall market movement. As for investing in the Sensex, while it is not possible to purchase units of the index itself, you can invest in index funds that track this benchmark index. So, if the benchmark index performs well, your index funds may also generate returns accordingly.