SENSEX is the short form of “Sensitive Index”. It is a stock market index which means choosing some financially sound companies from every sector which are considered as representatives to the whole market segment. They choose the top 30 companies from 10 different sectors to represent the whole market in BSE.

Sensex is the stock market index of the Bombay Stock Exchange. So, out of 5,000 companies listed on BSE, 30/31 stocks are listed on SENSEX.

It was founded in the year 1975 by Premchand Roychand, one of the most influential businessmen of 19th-century in Bombay (now called Mumbai). It was established in 1985 and was Asia’s first stock exchange. The closest competitor of BSE is NSE (National Stock Exchange). The base value has been set at 100 in the base year 1978-79.

**What is the methodology used to calculate  Sensex?

Initially, Sensex used the weighted market capitalisation methodology.

It shifted to ‘Free Float market capitalization’ methodology with effect from since September 1, 2003. All major indices around the world use the free-float methodology.

*What is meant by free float?

Free-float is that percentage of total shares issued by the company that are readily available for trading in the market. It excludes shares held by promoters, government etc.

To illustrate: If a company has 100 shares in total, of which 39 are held by the promoters, Government etc and 61 shares are available for trading to the general public. These 60 shares are the ‘free-floating’ shares and the free float percentage will be 61 % or 0.61.

*What is meant by market capitalisation?

Market capitalisation represents the valuation of a company. It is determined by multiplying the price of their stocks with the number of shares issued by that company. Market capitalisation = price * quantity

Free-float market capitalisation is determined by multiplying the total market capitalisation with the free float factor.

BSE determines the free-float factor based on the percentage of free float. The free float percentage is rounded off to a higher multiple of 5.

To continue with the above illustration, the free float percentage is 61 % or 0.61. Hence, the free float factor is 0.65

So, free-float market capitalisation = market capitalisation * free float factor

*Process of calculation of Sensex

First, the market capitalization is taken into account. This is done by multiplying all the shares issued by the company with the price of its stock. Then BSE determines a Free-float factor that is a multiple of the market capitalization of the company. This helps in determining the free-float market capitalization based on the details submitted by the company. Then, Ratio and Proportion are used based on the base index of 100. This helps to determine the Sensex.

Suppose the index has two companies – X and Y.

Company X has 500 shares out of which 300 are free-floating or available for the general public to buy and sell. The price of each share is Rs.80.

Company Y has 1000 shares out of which 700 are free-floating. The price of each share is Rs. 100

Market capital of Company X = 40000

Market capital of Company Y = 100000

Free-float factor for Company X = 0.60

Free-float factor for Company Y = 0.70

Total free float market capital of the index = (40000*0.60) + (100000*0.70) = 94000

Let us assume the base year index was 5000.

Value of Index = (94000 x 100)/5000 = 1880

So the Value of the Index is 1880.

*Which Companies are selected for Sensex?

There is a screening criterion in the selection of Sensex companies.

All companies which are listed in the Bombay Stock Exchange are included in Sensex.

As of now, more than 5,000+ companies are listed in BSE.

The stock exchange follows a screening criteria to shortlist stocks for Sensex.

 How it’s done?

All 5,000+ companies of BSE are categorized into 4 groups. The grouping is:

A Group,

B Group,

T Group,

Z Group.

#1. REQUIREMENT

Z-Group companies are excluded: These are companies which did not comply with BSE regulations.

IPO’s: cannot be included in Sensex. To be eligible for Sensex, companies must be listed in BSE for a minimum of 3 months.

Daily Trading: In its past 3-month cycle, the company’s stock must have been traded on every day.

4Q Reporting: The company must have reported its sales turnover (total income) of the last 4 quarters.

#2. SCREENING

Once the above requirements are satisfied, the company is permitted to go through the following screening process:

Screening 1 (Free-Float): The shortlisted companies are listed in order of their “average three-month float market capitalization”. Only the top 75 ranked companies are considered for further screening.

Screening 2 (Full Market Cap): All 5,000+ companies are ranked based on their full market capitalization (3 months average). Again, the top 75 ranked companies are selected.

The companies shortlisted in 1 & 2 above (75+75) are combined to form one list.

Screening 3 (Trading Volume): The list of combined companies are then ranked once again based on their average traded volume (of last 3 months). Companies whose cumulated value traded is <98% are excluded from the list.

Screening 4 (Weigh): Balance companies are again ranked based on float-market capitalization. Companies which had calculated weight of less than 0.5% are again excluded.

The balance gives the final list of the Sensex 30 companies.

**Weightage of listed 30 Sensex companies!!