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Sensex an Overview

Stock Market

A stock market is a physical place, where brokers gather to buy and sell stocks and other securities. It is also known as a stock exchange. A stock market enables the trading - buying and selling - of stocks. In some places, stock markets (Not Stock Exchange) still have a fixed location, but in the modern internet and technological world which we now live in, it can be a network of computers enabling buying and selling of stocks at agreed prices.

Stock is generally considered to be a part ownership in a company. These companies are 'listed' or 'quoted' in the stock exchange which means that they are publicly traded and anyone can purchase a part ownership in that. In recent years, the role of some stock exchanges has changed to include derivatives - futures and options to you and me. These are part of a highly complex world which will not be explained here, but they are an enormous economy unseen by the population at large. In India we have two major stock exchanges; they are NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Sensex is the Index of BSE and NIFTY is the index of NSE. In this article we will discuss about Sensex, such as history, working, objective, etc.

What is SENSEX?

The SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India and has gained a unique place in the collective awareness of investors. The index is widely used to measure the performance of the Indian stock markets. SENSEX is considered to be the pulse of the Indian stock markets. As the oldest index of the Indian Stock market, it offers time series data over a fairly long period of time (since 1978-79).

Objectives of SENSEX

The Sensex is the benchmark index of the Indian Capital Markets with wide acceptance among individual investors, institutional investors, foreign investors and fund managers. The objectives of Sensex are following :

• To measure market movements
• Benchmark for funds performance
• For index based derivative products

To measure market movements

Given its long history and its wide acceptance, no other index matches the SENSEX in reflecting market movements and sentiments. SENSEX is widely used to depict the mood in the Indian Stock markets.

Benchmark for funds performance

The inclusion of blue chip companies and the broad and balanced industry representation in the SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.

For index based derivative products

Institutional investors, money managers and small investors all refer to the Sensex for their specific purposes The Sensex is in effect the substitute for the Indian stock markets. The country's first derivative product i.e. Index-Futures was launched on SENSEX.

SENSEX - Scrip Selection Criteria

The general guidelines for selection of components (Scrips) in SENSEX are as follows :

Listed History

The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.

Trading Frequency

The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.

Final Rank

The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.

Market Capitalization Weightage

The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index.

Industry/Sector Representation

Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

Track Record

In the opinion of the BSE Index Committee, the company should have an acceptable track record.

History of Replacement of Scrips in SENSEX
SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology, wherein, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is again multiplied by the free-float factor to determine the free-float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments occuring out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds. The value of SENSEX is circulated in real time.

Beta of SENSEX Scrips

Beta calculates the sensitivity of a scrip movement relative to movement in the benchmark index i.e. Sensex. A Beta of one means that for every change of 1% in index, the scrip moves by 1%.

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