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As an investor, it is imperative to understand the terms that form a bedrock of the Indian Stock Market. The terms such as BSE, what is an Index, what is Sensex, how to calculate an index, what is Nifty 50, etc

Here is an article that explains the concept along with a guide on how to calculate the Sensex index.

bse sensex
bse sensex

What is BSE?

BSE stands for the Bombay Stock Exchange and was founded in the year 1875. BSE is the first and one of the largest securities exchanges based on out of Bombay in India

What is NSE?

NSE stands for the National Stock Exchange and was established in the year 1972. NSE is a nation-wide stock exchange very similar to the BSE. BSE was established much earlier than NSE. NSE is larger than BSE in terms of number of daily trades and turnover ratio

What is BSE Sensex in India?

A stock market analyst Mr. Deepak Mohoni introduced the term Sensex. The term Sensex is a portmanteau of Sensitive and Index. The Sensex is an index that reflects the Bombay Stock Exchange (BSE) 

The Sensex comprises 30 stocks on BSE. These stocks are the largest and most actively traded stocks on the BSE. The following criteria are considered to select 30 stocks:

  1. Listed on BSE
  2. It should be a large to mega-cap stock
  3. Relatively liquid stocks
  4. Revenue generated from core activities
  5. A diversified and balanced sector involvement in line with the Indian equity market

The Sensex reflects the movements in the Indian stock market. If the Sensex increases, it means the prices of the underlying 30 stocks have increased. If the Sensex has decreased, it means the prices of the underlying 30 stocks have decreased

The Sensex is the oldest index in India and one can consider it to be a  reflection of the Indian economy.  Market research analysts refer to the Sensex to understand the overall growth, development in industry, country’s stock market trend.

What is Sensex Nifty?

Just like the Sensex, Nifty is also an index. The Nifty reflects the National Stock Exchange. The Nifty 50 also is a benchmark index and it comprises the top 50 stocks traded on NSE.

The selection of the top 50 stocks is from 12 different sectors including information technology, financial services, consumer goods, telecommunications, automobiles, etc

How to calculate is Sensex?

Earlier the Sensex used the weighted market capitalization method. After September 1, 2003, the  BSE followed the Free Float Market Capitalization method to calculate the index. A majority of the stock markets across the globe follow the Free Market Capitalization Method. By following the free-float market capitalization, the 30 stocks directly reflect the index level.

Free Float Market Capitalization = Market Capitalization * Free Float Factor. 

What is the free float factor?

The free float factor is the % of total shares issued by the company and is readily available to the common public to trade. The shares issued to the promoters, the government, etc that are not available for trading on the market

For instance, a company has issued a total of 1000 shares.

Shares held by promoters and the government – 300 shares

Shares readily available for trading – 700 shares

Free float factor = 700 shares / 1000 shares

                                = 70%

What is market capitalization?

The market capitalization is the market value of the company

Market capitalization = Share price per share * number of shares issued by the company

How to calculate the BSE Sensex Index?

Now that we are aware of the terms and calculation methodology. Let us know how to calculate the index.

  • Firstly, the 30 companies are selected as per the set criteria
  • Secondly, determine the market capitalization of these 30 stocks
  • Thirdly, determine the free-float market capitalization of these 30 stocks
  • Lastly, sum up the free-float market capitalization of all the 30 stocks

The Sensex index formula
(Total free-float market capitalization/ Base market capitalization) * Base index value.

  • The base market capitalization as per BSE is Rs. 2501.24 crore
  • The base index value is 100.

Therefore,

Sensex Index = (The summed up free float market capitalization/25041.24 crores) * 100

How to trade on BSE Sensex?

Both BSE and NSE are stock exchanges in India. To trade on BSE or NSE, you need an online trading account with a stockbroker. The stockbroker, in turn, will provide you the facility to trade online.

Published on August 3, 2020