A stock exchange is a place which acts as a continuous auction market where buyers and sellers can trade securities. Bombay Stock Exchange (BSE) is the first and largest securities market of India. It is based in Mumbai and was established in 1875 as the Native Share and Stock Brokers’ Association. It is one of the largest stock exchanges in the world which includes about 5000 listed companies.
Now, let us try to understand the meaning of stock market index.
A stock market index is a metric that tracks the performance of several selected stocks from each sector. Sensex is an abbreviated form of Sensitive Index. It is the stock market index of The Bombay Stock Exchange. It is also called S&P BSE Sensex.
Sensex includes 31 companies selected from about 13 industrial sectors. The companies are selected on the basis of their financial soundness and performance in a way to represent overall performance of their respective sectors. These selected companies are reviewed regularly and changes may be made in the constituent companies of the index as and when required.
The index is widely reported in both domestic and international markets through print as well as electronic media.
Objectives of S&P BSE Sensex
Some of the objectives of the Sensex are:
Measurement of Indian Market Movement: Due to a long history and wide acceptance, BSE is considered to be a very good indicator for reflecting Indian market movements and sentiments of traders, speculators and investors.
Acts as Benchmark: Due to the complete and balanced representation of all the sectors, Sensex acts as an appropriate benchmark for fund managers to compare the growth of their funds.
Index Based Derivative Products: Due to the constituent companies of the Sensex, all kinds of investors refer to S&P BSE SENSEX for their trading and investment purposes. It is the most liquid contract in the Indian market.
Calculation Methodology of Sensex
Initially, SENSEX was calculated based on the “Full Market Capitalization” methodology but since it is a less effective and thus, less preferred method, the calculations later shifted to the free-float methodology with effect from September 1, 2003.
This means that instead of considering the full market capitalization of the company, only the free-float capitalization is considered while calculation of the index and assigning weights to stocks in the index. Free-float refers to those shares of the company that are readily available for trading in the market. It excludes promoters’ holding, government holding, insiders’ holding, equity held by Employee Welfare Trusts and other locked-in shares.
Every quarter, all the companies are required to submit a free-float format designed by the BSE. Then, the free-float factor for each company is determined by the BSE based on the information provided by them in the prescribed format.
The free-float factor is a multiple with which the total market capitalization of a company is adjusted to arrive at the free-float market capitalization. After the free-float of a company is determined, it is rounded off to the higher multiple of 5 and each company is categorized into one of the 20 bands given below.
For example, a free-float factor of 0.65 means that only 65% of the market capitalization of the company will be considered for index calculation.
% Free Float
Free Float Factor
>0 – 5%
>5 – 10%
>10 – 15%
>15 – 20%
>20 – 25%
>25 – 30%
>30 – 35%
>35 – 40%
>40 – 45%
>45 – 50%
>50 – 55%
>55 – 60%
>60 – 65%
>65 – 70%
>70 – 75%
>75 – 80%
>80 – 85%
>85 – 90%
>90 – 95%
>95 – 100%
Selection Criteria for Securities listed on Sensex
Basically, the securities that constitute S&P BSE Sensex are screened on two main criteria:
Quantitative Criteria – They include the following five main points-
Market Capitalization – The security should be in the Top 100 companies listed by full market capitalization. The weight of each security, which is based on free-float should be at least 0.5% of the Index.
Listing History – The security should have been listed for at least one year on Sensex
The frequency of Trading – The security should have been traded on every trading day for the last one year. Sometimes, an exception can be made in case of extreme situations like suspension of security
Average Daily Trades – The rank of the security should be among the top 150 companies listed by the average number of trades per day for the last one year.
Average Daily Turnover – The security should rank among the top 150 companies listed by the average value of shares traded per day for the last one year.
Qualitative Criteria – The stocks selection committee or the index committee should be of the opinion that the track record of the particular security is acceptable to be a part of the index.
As of April 2018, the companies that form the Sensex are listed below in decreasing order of their weightings:
Housing Development Finance
Oil & Natural Gas
Kotak Mahindra Bank
Larsen & Toubro
Tata Motors DV Ltd
Mahindra & Mahindra
Tata Steel Ltd
Dr. Reddy’s Labs
To give you a clearer idea, here is the Sensex reading from one of the trading sessions:
The index value of 34,928.33 comes from the total of the listing of the companies mentioned above. This total count varies based on the numerical stance of those companies at any given point in time.
Trading on BSE includes stocks, stock futures, stock options, index futures, index options and weekly options and the day-to-day maintenance of the index is taken care by the Index Cell of the exchange.
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