The Sensex is one of the most well-known stock market indices in India. Often featured in news headlines, phrases like “Sensex surged 500 points” or “the market fell” highlight its influence. But what exactly does Sensex mean, and why does it matter to investors? Let’s explore everything about Sensex, from its meaning and calculation to how it differs from other indices like Nifty.
What is BSE?
The Bombay Stock Exchange (BSE), established in 1875, is Asia’s first stock exchange. It is headquartered in Dalal Street, Mumbai, and is known for its speed and efficiency, processing transactions within six microseconds. BSE is the backbone of India’s capital markets, providing platforms for trading in equity, debt instruments, mutual funds, and more.
Key Highlights of BSE:
It offers trading in mutual funds through its BSE StAR MF platform.
It operates India INX, the country’s first international exchange.
BSE Sensex, its flagship index, reflects the performance of 30 major companies listed on the exchange.
What is NSE?
The National Stock Exchange (NSE), established in 1992, is the largest financial market in India by trading volume. It introduced electronic trading in India, enhancing transparency and efficiency.
Key Highlights of NSE:
NSE’s products include equities, derivatives, ETFs, and fixed-income securities.
Nifty 50, its flagship index, tracks the performance of 50 major companies across 12 sectors.
What is a Stock Market Index?
A stock market index tracks the performance of selected stocks to represent market trends. Indices like Sensex and Nifty are benchmarks for evaluating the overall health of the stock market.
Key Features of a Stock Market Index:
It includes top-performing companies based on criteria like market capitalization and liquidity.
Changes in the prices of the included stocks directly affect the index value.
Indices help investors gauge market sentiment and make informed investment decisions.
What is Sensex?
The Sensex, short for Sensitive Index, is the BSE's benchmark index. It comprises 30 of the largest and most actively traded companies across various sectors.
Selection Criteria for Sensex Companies:
Must be listed on the BSE.
Should have a large or mega market capitalization.
Should exhibit high liquidity.
Revenue should primarily come from core business operations.
Companies must represent diverse sectors.
Significance of Sensex:
It reflects the overall performance of the Indian stock market.
It serves as a barometer for the Indian economy.
What is Nifty?
Nifty, derived from “National Fifty,” is the NSE's benchmark index. It comprises 50 major companies in diverse sectors, such as IT, finance, and consumer goods.
Selection Criteria for Nifty Companies:
The stock must have a low impact cost during trading.
It should meet minimum market capitalization requirements.
The company must be listed on the NSE.
How is Sensex Calculated?
The BSE Sensex uses the Free Float Market Capitalization Method, which considers only the shares available for trading in the market (excluding shares held by promoters and government entities).
Steps to Calculate Sensex:
Calculate the Free Float Market Capitalization for each of the 30 companies: Free Float Market Capitalization = Market Capitalization × Free Float Factor.
Determine the Sensex value using the formula: Sensex = (Total Free Float Market Cap / Base Market Cap) × Base Value.
The base year for Sensex is 1978-79, and the base value is 100.
How to Trade on Sensex?
To trade stocks listed in the Sensex, follow these steps:
Open a Demat Account:
A Demat account holds shares in electronic form.
It can be opened with Depository Participants (DPs) registered with CDSL or NSDL.
Open a Trading Account:
Required for buying and selling stocks.
Register with a Stockbroker:
Brokers act as intermediaries between investors and stock exchanges.
Bank Account and PAN:
Both are mandatory for trading.
Differences Between Sensex and Nifty
Basis | Sensex | Nifty |
Full Form | Sensitive Index | National Fifty |
Managed By | Bombay Stock Exchange (BSE) | National Stock Exchange (NSE) |
Number of Stocks | 30 | 50 |
Base Year/Value | 1978-79 (Base Value: 100) | 1995 (Base Value: 1000) |
Global Presence | Traded on EUREX and BRICS exchanges | Traded as SGX Nifty and CME Nifty |
Types of Stock Market Indices
Benchmark Index:
Represents overall market performance.
Examples: Sensex, Nifty 50.
Broad Market Index:
Covers more companies than benchmark indices.
Example: BSE 100.
Market Capitalization Index:
Focuses on small-cap, mid-cap, or large-cap stocks.
Examples: Nifty Midcap, BSE Smallcap.
Sector-Specific Index:
Tracks companies within a specific industry.
Examples: Nifty Pharma, Nifty IT.
Significance of Stock Market Indices
Simplifies Stock Selection: Indices group stocks by size or sector, making it easier for investors to choose.
Helps Beginners: New investors can use indices as benchmarks to understand market trends.
Reflects Investor Sentiments: Indices show how market participants perceive the economy or a particular sector.
Enables Passive Investing: Investors can replicate the performance of an index by investing in index funds.
Conclusion
Sensex and Nifty are indispensable tools for understanding the Indian stock market. They provide a snapshot of market performance, reflect investor confidence, and guide investment decisions. Whether you’re a seasoned investor or a beginner, these indices can help you navigate the complexities of the financial world with ease.
