Sensex- Meaning, Calculation and types of indices

Introduction

We constantly come across in the news that Sensex has soared. Or the market has fallen, causing fear in the mind of investors. Sensex shot up by 500 points. But what exactly do market and Sensex mean? Why is it measured in terms of points? In this article, we have covered what Sensex and Nifty is. Why do they rise and fall? How Sensex is calculated and what is its significance.

What is BSE?

BSE is formerly known as Bombay Stock Exchange. It was established in the year 1875 and located in Dalal Street in Mumbai, India. It is Asia’s first and fastest stock exchange with a speed of 6 microseconds. Also, BSE is the first stock exchange to be listed in India.

BSE facilitates trading with efficiency and transparency in equity, mutual funds, derivatives, debt instruments, and currencies. In addition to trading, it provides other services like risk management, clearing and settlement, and investor education.

BSE has played a significant role in shaping and developing Indian capital markets by providing a platform for raising capital. BSE also has BSE SME. It is a trading platform for over 250 small and medium enterprises. It also provides mutual fund services through BSE StAR MF. Also, it is India’s largest mutual fund platform. BSE also has a transparent electronic book mechanism process for a private placement of debt securities called BSE Bond. It also has an international exchange India INX, which is India’s first international exchange. 

BSE Sensex is the popular equity index of BSE. It is one of the most widely used and tracked indexes. Also, BSE Sensex trades internationally on EUREX and on the exchanges of Brazil, Russia, China and South Africa (BRCS nations).

What is NSE?

National Stock Exchange of India Ltd was incorporated in 1992. It is also the largest financial market in India. It has the highest average daily turnover for equity shares than any other stock market in India.  NSE has a vertically integrated business model. It recognizes technology as a core of financial markets that will improve transparency in the market.

National Stock Exchange NSE organizes its products into three asset classes for trading, namely equities, derivatives and fixed-income securities. Under equity, the list of products for trading includes mutual funds, stocks, ETFs, closed-ended mutual funds, and Indian Depository Receipts (IDRs). Derivatives comprise of the contracts for equities, currencies, commodities and interest rates. Under fixed income securities sovereign gold bonds, corporate bonds, tri-party repo and other debt securities.

NSE’s services across all products include trading, clearing and settlement, exchange listing, financial education and technological solutions.

Its famous index Nifty 50 trades on Singapore and Chicago Mercantile Exchange as SGX Nifty and CME Nifty respectively.

Recommended Read: How to Invest in Nifty 50?

What is a Stock Market Index?

A stock market index tracks the changes in the stock market. A stock index is created by picking up securities listed on the stock exchange. The criteria for choosing stocks for the stock market index can be market capitalization or the industry. Even though the stocks chosen for the index are limited, they represent the entire Indian stock market. Any change in the price of these stocks affects the entire stock market index. The movement of the stock index depicts the sentiment of the overall market and the price movements of other financial products, including commodities. Examples of popular stock market indices in India are BSE Sensex Index and Nifty 50 Index.

What is Sensex?

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 Index comprises 30 stocks on BSE. These stocks are the largest and most actively traded stocks on the BSE. The criteria for selecting stocks is as follows:

• Listed on BSE
• It should be a large to mega-cap stock.
• Relatively liquid stocks
• Revenue generated from core activities
• 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 people 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 Nifty?

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

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

To be part of Nifty 50, the companies require to meet the following parameters and criteria:

• Liquidity: Over the last six months, the stock should have been traded at an average cost of 0.50% or less.
• Float Adjustment: The company’s float-adjusted market capitalization has to be at least twice the current smallest index composition. 
• Domicile: The company should be listed on the NSE and be an Indian company.

How is Sensex calculated?

BSE Sensex value calculation uses Free Float Market Capitalization method. Earlier, the Sensex used the weighted market capitalization method. However, from September 1st, 2003, the free-float market capitalization method has been in use. Upon selecting the 30 stocks for the index, it uses the free float market capitalization method to calculate the value of the index.

The first step is to determine the free float market capitalization of 30 companies that form the index.

FreeFloat Market Capitalization = Market Capitalization * FreeFloat Factor.

Free Float factor is the percentage of total shares a company issues and that are readily available to the common public to trade. This also means the total outstanding shares of the company. Additionally, the shares issued to the promoters, the government, etc. that are not available for trading on the market are not included. The market capitalization is the market value of the company.

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

Once the free float market capitalization is determined. The value of BSE Sensex can be calculated using the formula below.

BSE Sensex calculation

Value of Sensex = (Total free float market capitalization/ Base market capitalization) * Base period index value.

The base period (year) for Sensex calculation is 1978-79. The base value index is 100. Using the above formula, one can calculate the value of BSE Sensex.

How to trade on BSE Sensex?

To trade (buy or sell securities) on BSE, one needs to have a demat and a trading account. A demat will hold the shares in dematerialized or electronic form. Also, a demat account acts just like a bank account, where the securities are debited or credited based on the transaction. One can open a demat account with a Depository Participant (DP) who are either registered with Central Securities Depositories Limited (CSDL) or National Securities Depository Limited (NSDL) or both.

A trading account will facilitate the sale and purchase of securities online. The next step is to register with a broker or brokerage platform, as one cannot directly purchase securities from the stock exchange. Stockbrokers are financial intermediaries who act as a link between the stock exchange and the trader.

In addition to trading and demat accounts, a bank account and PAN card are necessary for trading on BSE.

Many companies provide both trading and demat accounts. Investors can use their services to trade on NSE or BSE or both.

You may also like to read about CDSL vs NSDL

What is the difference between Sensex and Nifty?

Both BSE Sensex and Nifty 50 are stock market indices that depict the health of the market. Both Nifty and Sensex use similar methods to derive their values. However, there are a few basic differences between Nifty and Sensex.

Basis of Difference	BSE Sensex	Nifty 50
Full Form	Sensex is derived from Sensitive Index	Nifty 50 is derived from National Fifty
Owned by	BSE Sensex is an index owned and managed by BSE	Nifty 50 is owned and managed by NSE Indices.
Number of Companies in the index	30	50
Base year and value	The base year is 1978-79, and the base value is 100	1995 is the base year, and 1000 is the base value
Foreign Exchanges	BSE Sensex is traded on EUREX and stock exchanges of BRCS nations	NIFTY 50 is traded on Singapore Stock Exchange (SGX) and Chicago Mercantile Exchange (SME)

You may also like to read about the Sensex vs Nifty

Types of Stock Market Indices

The stock market has a variety of indices. Following are some of the popular indices:

Benchmark Index

Benchmark index is the primary metric for analyzing market trends. The index indicates the performance of the entire stock market. The market also uses the benchmark index as a comparative measure. In other words, it measures the market returns from an average fund versus the amount that it would have earned. Examples of benchmark indices are NIFTY50 and BSE Sensex.

Broad Market Index

The broad market index is benchmark indices. However, they comprise more number of stocks into the index. For example, BSE Sensex comprises the 30 biggest companies that are financially sound. On the other hand, BSE 100 comprises top 100 companies.

Market Capitalization Index

Market capitalization index comprises stocks on the basis of their total market capitalization, i.e., the value of their outstanding shares. For example, BSE Midcap, NIFTY Smallcap etc.

Sector or Industry-based Index

The index comprises companies or stocks in a particular sector or industry. For example, stocks in industries like banking, healthcare, technology, etc. Some of the sector or industry-based indices are NIFTY FMCG Index, CNX IT, NIFTY Pharma Index, and NIFTY Financial Services Index.

Significance of a Stock Market Index

Stock market indices such as NIFTY and Sensex depict the stock market performance/condition. Investors can study the patterns of the stock market using these indices.

Helps in stock picking

A share market has thousands of companies listed on it. For an investor to study all the stocks before narrowing down his investment options is impossible. Also, without a benchmark index, it is very difficult to differentiate two stocks. Here’s when stock market indices come handy. Additionally, an index segregates the stocks based on their size, industry, and financial impact, etc. Therefore, investors can compare stocks that comprise an index and narrow down their search.

Helpful for beginners

Equity markets are volatile, and hence investors need to proceed with caution. While beginners are not well aware of the market dynamics, market indices are a good reference to understand the performance of the share market. Beginners who aren’t hiring a financial advisor can follow and invest through an index.

Reflects investor sentiments

One can easily analyze the investor sentiments through the market indices. For example, certain reform announcements create a sense of pressure on certain stocks. In other words, some investors expect that a change in reform may have an impact on a company and based on that they buy or sell the stock. However, analyzing the underlying sentiment is important to estimate the impact of the trend.

Passive investment option

Investors can find a shortcut to investing in the best stocks by investing in a fund that has the same composition as an index. This is referred to as passive investing as the investor doesn’t have to do much research with respect to selecting the stocks or investing individually in all of them. With a single click, they can invest in index funds that are a replica of the benchmark index.

Explore: Basics of Stock Market

Is a Demat account necessary for trading on BSE and NSE?

Yes, to invest in stock trading in NSE and BSE, one needs a demat and trading account. A trading account is for buying and selling of shares. At the same time, a demat account acts as a bank for holding the shares that an investor buys. Also, one can open a demat account with any stock broker.  

What are the companies listed in BSE Sensex?

BSE Sensex index comprises of the following stocks as of August 2020:

1. Reliance Industries Ltd.
2. HDFC Bank Ltd.
3. Infosys Limited
4. Housing Development Fin. Corp. Ltd.
5. Tata Consultancy Services Ltd.
6. ICICI Bank Ltd.
7. Hindustan Unilever Ltd.
8. Kotak Mahindra Bank Limited
9. ITC Ltd.
10. Bharti Airtel Ltd.
11. Larsen and Toubro Ltd.
12. Axis Bank Ltd.
13. Maruti Suzuki India Limited
14. Bajaj Finance Ltd.
15. Asian Paints Limited
16. HCL Technologies Ltd.
17. State Bank of India
18. Nestle India Ltd.
19. Mahindra & Mahindra Ltd.
20. Sun Pharmaceutical Industries Ltd.
21. UltraTech Cement Limited
22. Titan Company Ltd.
23. Power Grid Corporation of India Ltd.
24. Tech Mahindra Ltd.
25. Bajaj Auto Limited
26. Bajaj Finserv Ltd.
27. NTPC Limited
28. Indusind Bank Ltd.
29. Tata Steel Ltd.
30. Oil & Natural Gas Corporation Ltd.

What are the companies listed in NSE Nifty 50?

Nifty 50 index comprises of the following stocks as of August 2020:

1. Tata Motors Limited
2. Hindalco Industries Ltd.
3. Larsen & Toubro Ltd.
4. Titan Company Ltd.
5. Bharti Infratel Ltd.
6. Adani Ports and Special Economic Zone Ltd.
7. Hero MotoCorp Ltd.
8. HCL Technologies Ltd.
9. Ultratech Cement Ltd.
10. Indian Oil Corporation Ltd.
11. Grasim Industries Ltd.
12. Tech Mahindra Ltd.
13. JSW Steel Ltd.
14. Oil & Natural Gas Corporation Ltd.
15. Zee Entertainment Enterprises Ltd.
16. UPL Ltd.
17. Power Grid Corporation Of India Ltd.
18. Asian Paints Ltd.
19. ICICI Bank Ltd.
20. Wipro Ltd.
21. Hindustan Unilever Ltd.
22. Coal India Ltd.
23. Kotak Mahindra Bank Ltd.
24. Bajaj Finance Ltd.
25. Maruti Suzuki India Ltd.
26. Tata Consultancy Services Ltd.
27. Britannia Industries Ltd.
28. Bharat Petroleum Corporation Ltd.
29. Bajaj Finserv Ltd.
30. Cipla Ltd.
31. Reliance Industries Ltd.
32. Bajaj Auto Ltd.
33. Dr. Reddys Laboratories Ltd.
34. Tata Steel Ltd.
35. IndusInd Bank Ltd.
36. Nestle India Ltd.
37. Infosys Ltd.
38. HDFC Bank Ltd.
39. Shree Cement Ltd.
40. Mahindra & Mahindra Ltd.
41. Housing Development Finance Corporation Ltd.
42. GAIL (India) Ltd.
43. Axis Bank Ltd.
44. State Bank Of India
45. ITC Ltd.
46. HDFC Life Insurance Co Ltd.
47. NTPC Ltd.
48. Eicher Motors Ltd.
49. Sun Pharmaceutical Industries Ltd.
50. Bharti Airtel Ltd.

Recommended Read: Commodity Index