What is BSE Sensex and How Does it Work?

What is BSE Sensex and How does it work?

Sensex zooms 680 points to hit a record high! Sensex falls to lifetime lows! We usually come across these headlines and as beginners in stock markets, often wonder ’What is the BSE Sensex?’, ‘How does Sensex work? and ‘Why is Sensex regarded as the pulse of the Domestic Stock Market? Sensex is the benchmark index of the Bombay Stock Exchange and is used by investors and traders to gauge the overall pulse of the Indian economy. In this article, we will discuss:

What is BSE?
Who introduced BSE Sensex?
Criteria for selection of 30 stocks for BSE Sensex
How is Sensex calculated?
How Sensex Works?

What is BSE?

BSE or Bombay Stock Exchange, established in 1875 is the oldest stock exchange in Asia. It was started under the name "The Native Share & Stock Brokers Association" in 1875. Today, BSE is the 10th biggest stock exchange in the world with a record order matching speed of 6 microseconds! [Suggested Reading: What is NSE & BSE? | NSE or BSE, Which is better?]

Who introduced the term ‘Sensex’?

Mr Deepak Mohoni, an Indian stock market analyst introduced the benchmark index, ‘TheSensitivity Index', popularly known as ‘Sensex’. Sensex is the oldest index in India and is known as a reflection of the Indian economy. It was first compiled in 1986 and comprises of 30 most actively traded stocks on BSE. List of BSE Sensex Stocks Let us now see how these 30 stocks reflecting the pulse of the Indian economy are selected.

Criteria for selection of 30 stocks for BSE Sensex

Sensex is a basket of 30 stocks which represents a sample of large, liquid and representative companies. These stocks are selected on the following criteria:

The stocks should be listed on BSE
It should be a large to mega-cap stock
Relatively liquid stocks
High revenue generating companies
A diversified and balanced sector involvement with the Indian equity market.

Before we understand how is Sensex Index calculated, here are few terms you need to understand:

Free float factor

Free float refers to the quantum of shares available for trading with the general public. For example, ABC Ltd has issued a total of 1000 shares. Shares held by promoters and the government – 300 shares Shares available for trading – 700 shares Free float factor = 700 shares / 1000 shares = 70% So, 70% of shares are available in the market as free float shares of ABC Ltd.

Market capitalization

Market capitalization is the market value of the total outstanding shares of a company. Market capitalization = Share price per share * number of shares issued by the company

How is Sensex calculated?

Initially, the index was calculated based on the 'market capitalisation' method. But since September 1, 2003, Sensex is calculated as per the ‘free-float’ method. Globally, the Free Market Capitalization Method is regarded as industries best practice used by S&P, Dow Jones, etc.

30 companies are selected as per the set criteria of Sensex.
Determine the market capitalization of these 30 stocks
Determine the free-float market capitalization of these 30 stocks
Sum up the free-float market capitalization of all the 30 stocks

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

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/2501.24 crores) * 100

How Sensex works:

If Sensex goes up, it means the aggregate prices of the underlying 30 stocks have increased.
If the Sensex goes down, it means the aggregate prices of the underlying 30 stocks have decreased

How to trade in companies listed on BSE Sensex?

Since you now understand how Sensex is calculated and how it works, let us understand. step-by-step, how to trade in companies listed on BSE Sensex.

Firstly, open a trading and Demat account. Fortunately, you don’t have to look far, as Samco has been awarded as the best equity stock broker in India by CNBC – Awaaz and is a leader in providing the most technologically advanced Demat account in India.
Once your Demat account is opened, you simply need to transfer funds from your bank account to your trading account and start trading on NSE or BSE!

So, open the best Demat and Trading account in India with Samco today and start creating infinite wealth in the stock markets! Important Links Why Samco is the Best Demat Account in India? Advantages of a Demat Account Understanding a Demat Account statement Do’s & Dont’s of a Demat Account How to use a Demat Account? Detailed Demat Account charges —- Visit the Samco Knowledge Centre for more such useful articles Learn StockMarkets for free on www.tradeflix.com —-