The Sensex has become an integral barometer measuring the pulse of corporate India. This index of the largest publicly-listed companies across major industries is keenly tracked by a wide cross-section of stakeholders - from investors and traders to businesses, analysts, and even the broader public.
What is Sensex?
BSE Sensex is an amalgamation of the words ‘Sensitive’ and ‘Index.’ It was devised by Deepak Mohoni, an Indian stock market expert to represent an index of the most actively traded stocks on the BSE. Since liberalization in the 1990s, the Sensex share has evolved to become India’s foremost benchmark index reflecting the health of the country’s corporate sector.
Understanding Sensex Composition
The Sensex tracks the valuation of major BSE 30 companies listed on the BSE across key industries, representing the drivers of the Indian economy. Constituent stocks must meet stringent listing history, liquidity, and public float thresholds set by the S&P BSE Index Committee to qualify for inclusion.
The BSE index composition is periodically reviewed and updated to mirror evolving market dynamics accurately. Stocks may be added or removed to maintain index relevance based on metrics like market capitalization, trading activity, and sector representation.
Some prominent blue chip BSE 30 companies currently part of the Sensex include:
1.Reliance Industries Ltd (RIL) - Oil, gas, and petrochemicals conglomerate - India’s most valuable company
2.Tata Consultancy Services (TCS) - Largest IT services and consulting firm
3.HDFC Bank - Largest private sector bank
4.Infosys Technologies - Second largest IT services company
5.ICICI Bank - Leading private sector universal bank
6.Housing Development Finance Corp (HDFC) - Largest housing finance company
7.ITC Ltd - Major cigarettes, FMCG, and hotels business house
8.Larsen & Toubro (L&T) - Largest engineering, construction and infrastructure enterprise
9.State Bank of India (SBI) - India’s biggest PSU bank
How Sensex Levels Are Computed?
The methodology for calculating Sensex values has evolved over the years in line with global best practices.
Initially, Sensex index levels were computed using a market capitalization-weighted average of the constituent stocks. So, companies with a larger overall market cap had a higher weightage in BSE index calculations.
However, since 2003, Sensex share calculations have shifted to a free-float market capitalization methodology similar to indices like the Dow Jones and S&P 500.
The free float method only considers shares actually available for trading by public investors instead of all outstanding shares, including locked-in promoter holdings. So, it excludes restricted shares held by company insiders that are not traded actively in the market.
The formula is:
Free Float Market Capitalization = Overall Market Cap x Free Float Factor
The free float factor is the proportion of shares available to public investors relative to the total outstanding shares issued.
So, the BSE index level reflects the aggregated free-float market valuation of the 30 Sensex component stocks relative to a 1978-79 base period marked as 100.
According to this method, companies with a larger portion of readily tradeable shares have a higher weightage in the index. By mirroring the investable market cap, the free float approach allows the Sensex to reflect market dynamics better.
Steps to Start Investing in Sensex Stocks
Here are the key requirements for investors seeking to buy Sensex constituent stocks:
1. Open a Demat Account
This account holds all your purchased shares in electronic demat form instead of physical certificates. Demat seamlessly facilitates trading and transfers.
Also Read: What are the Documents Required for Opening an Demat Account?
2. Open a Trading Account
A trading account with a SEBI-registered stock broker is mandatory for buying/selling shares through the exchange. BSE does not allow direct trading without a linked broker account. Trading accounts enable the easy placement of buy/sell orders online.
3. Have a Bank Account
You need a bank account to transfer funds to/from your trading account and receive payouts from share sales. Your bank account should be linked to the trading account for smooth fund flows.
4. Obtain PAN Card
A PAN card is an essential requirement as per Indian regulations to invest in stock markets and transact in securities for KYC compliance.
BSE Sensex and the Economy
Despite some limitations, like not covering the entire gamut of Indian stocks, the BSE Sensex remains a reliable indicator of the market outlook. Sensex performance assumes wider importance because stock investments form a critical part of household financial savings.
Moreover, listed companies account for over two-thirds of organized sector output, so their performance offers insights into production and investment trends critical to GDP growth. In this way, BSE Sensex trends over long periods align reasonably closely with macroeconomic trajectories.
For stock investors, decoding Sensex behavior is also vital to making informed portfolio decisions. Understanding the correlation between domestic growth cycles, global emerging market trends, and Sensex movements aids smarter investing by individuals and institutions alike.
Conclusion
The BSE Sensex remains the most prominent stock market index, capturing India’s economic health. It continues to be most widely followed by investors and stakeholders seeking insights into the country’s growth story. Though new indices have emerged, Sensex remains the ultimate barometer.
